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Why an HSA Beats an IRA Any Day

HSAs can save thousands each year
Are HSAs part of your retirement plan?

Health Savings Accounts (HSAs), many are surprised to learn, are actually super-tax-advantaged retirement vehicles. Oftentimes HSAs are confused with flexible spending accounts (FSAs). If you aren’t sure which kind of account you have, the FSA is the spend-it-or-lose-it account, while HSA balances carry over forever.

Why should we think of an HSA as a retirement vehicle, then? Compare an HSA’s taxes to other retirement accounts:

Tax-Deferred * Roth IRAs, 401(k)s HSAs
Contribution Deductible?
Retirement withdrawals not taxed? ✔ **

*Include IRAs, 401(k)’s, 403(b)’s, and Deferred Comp

**as long as the owner holds the HSA for at least five years or until they are over the age of 65.

As our table shows, HSAs are the only account where the contribution is deductible and withdrawals are tax-free.

Why Isn’t Everyone Using HSAs?

Unfortunately, most people don’t have access to HSAs. In order to be eligible, your health insurance must be a High Deductible Health Plan (HDHP) that is HSA-eligible. Don’t know if your plan is eligible? A quick call to your provider can help you find out.

How to Use an HSA

The catch with HSAs, though, is that in order for them to work as a retirement account, you must have a high deductible and contribute to the HSA without actually using it. Treat the HSA like an IRA and let the contributions grow until retirement.

HSA accounts don’t have to be opened through your health insurance provider, either. Both local banks and online investment firms such as Fidelity, Vanguard, TD Ameritrade, and Schwab offer the option to set up HSAs. Like with IRAs, you can invest the money in HSAs as you wish. There are annual limits on contributions, detailed below.

Deciding if HSAs are Right for You

For people with high ongoing medical expenses, affording the high deductible on top of the HSA contribution can be too much of a burden. If you are young, healthy, or simply a high earner, though, every $1 you put aside in an HSA will save you taxes now (think, 15% – 40%, depending on your bracket), grow tax-free, and provide a nice tax-free cushion for you later in life.

The limit for 2019 HSA contributions is $3500 for individuals and $7000 for a family if you are under 55.  If you are over 55, you get another $1000 catchup contribution. So, if you have access to one and haven’t taken advantage, you could make several hundred bucks back in taxes this year just by reading this post.  (You’re welcome!)

In short: HSAs are the best retirement account hardly anyone knows about.

Holly Donaldson

Holly Donaldson, CFP® runs an hourly and fee-for-service financial planning practice virtually from her Tampa Bay, Florida office. She also works with clients throughout the U.S. (except Texas) interested in retirement and tax planning advice without product sales or investment management. Holly is the author of The Mindful Money Mentality: How to Find Balance in Your Financial Future (Porchview Publishing, 2013) and publisher of the award-winning monthly e-letter, "The View From the Porch."

This Post Has 2 Comments

  1. Donna

    Wow I never heard of this account. Something I will look into right now. If you already have an IRA account you can still contribute to both?
    Thank you for the valuable information.

    1. Holly Donaldson

      Hi Donna, Yes you can contribute to both. Remember to make sure your health plan is
      “HSA eligible.”

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