Should I max out my HSA/IRA or neither?

Question

I wanted to know if I should put more money into my HSA, Roth IRA, or neither. If I had to choose between the two, the HSA seems like it provides more tax benefits than the Roth IRA. However, My company matches up to 5% of my IRA contributions.

I just don't know what I would be better off doing in this situation and i'm frantically trying to figure out the best course of action. I won't be touching this money for years to come so any and all advice is extremely appreciated!!

Thanks in advance!

Haley Gant · Answer

Hi Eric!

I would say if you are able to, fund both your HSA and Roth IRA, as they both have different benefits.

Both accounts will grow tax free, and the HSA contributions will be tax deductible as well. The HSA gives you a lot of flexibility, as you can reimburse yourself at anytime from your HSA tax free for any health expenses that you may be paying for out of pocket right now. Especially if you plan on leaving this money in the account for a while, if you end up paying for your health expenses out of pocket, you can access distributions from your HSA completely tax free to "reimburse yourself" at any time, as long as the HSA was in place at the time that health expense occurred.

One big benefit of the Roth IRA is that your contributions can come out at any time without any taxes or any penalties. The growth from your Roth IRA investments does need to stay in there until you are 59.5 in order to not be penalized, but Roth contributions can come out at any time. As others have mentioned, definitely take advantage of that free money from your employer matching!

Also, since the tax filing deadline for 2019 has been extended, you can still make your 2019 contributions to both accounts up until July 15th. Just something to keep in mind as well :)

Daniel McNulty · Answer

@Cheryl Vargas

It just needs to still be open. Your funds can be in cash or invested, as long as it is within the HSA. When you invest the HSA proceeds, the funds are still within the HSA, merely held in an investment instead of just cash. There is no age limit associated with the HSA.

Pat L. · Answer

We max out our HSA's & 401(k)-solos. As neither affects the other contribution limits. Roth is the way to go especially to avoid mandated RMD's later in life that may/could/will affect social security.

Haley Gant · Answer

Hi @Cheryl Vargas! Yes, if you no longer have a HDHP, you can still use your HSA, invest and grow the account, and use the distributions tax free for your qualified health expenses. If you are no longer covered on a HDHP, the only thing you can no longer do is make new contributions to the HSA. If you have any other questions, just let me know :)

Cheryl Vargas · Answer

Thank you @Daniel McNulty!

I just saw your response.  What transfer papers do I keep to show in the year 2040 that my HSA is "in place" and I have retired from my job in 2035 and no longer have the HDHP insurance, and the HSA had been transferred to an index fund in my Vanguard account back in 2020?  I have heard that I need to save all my receipts and take distributions from the Vanguard account the same as the medical receipt amounts to show that the distributions were qualified medical expenses from 10-20 years previously. What does the IRS need in order to show that the Vanguard account was previously an HSA account?

is it true that I would not get taxed on any gains in the vanguard account as long as I take distributions in 2040 with proof of the medical expenses from back in 2020 or in 2030, even though I contributed to my HSA with pre-tax money?

Cheryl Vargas · Answer

@Haley Gant

Thanks for getting back to me so quickly!

I see that I didn’t read your first comment correctly. You said that we can pay for medical expenses with the money as long as the HSA is in place, but I thought it had said the HDHP.  Good to know that the HDHP doesn’t have to be open anymore to use ithe money, but now I’m not sure of what is meant that the HSA has to be in place.

So what does ‘in place’ signify?  If I move my HSA to an investment fund such as a REIT stock, and wait to spend the money until I’m 66 years old, is the HSA still considered to be ‘in place’?

Cheryl Vargas · Answer

@Haley Gant

I saw that you mentioned that we can get distributions from our HSA as long as the HSA is still active.

What if I contribute to my HSA with my current employer, then leave the job in 5 years, but leave the money in the HSA account, or transfer it to Ameritrade and buy a REIT stock with it and leave it in the stock until I am 65.  Can I use the money from the HSA after I turn 65 for any type of expense, although I won’t be contributing to a HDHP any longer?

Doug Wilson · Answer

Hi Eric,

In this order - save enough in your retirement plan to receive all matching contributions you are eligible for, and then save as much as you can into your HSA. This assumes you don’t have any medical expenses coming up soon and already have a healthy cash reserve. Above and beyond that, go ahead and max out the retirement plan or build up cash for an upcoming deal depending on your goals.

Never turn down free money, and the HSA is a Cadillac. Only downsides to the HSA are the contribution limits are low and it requires a HDHP. All the more reason to start maxing it out as soon as possible (and do your best to stay healthy!)

Hope this helps.

Doug

Mark S. · Answer

Depends on your goals.  We’ll all have healthcare-related expenses down the road.  With that said, HSA is a no-brainer if you’re on a high deductible plan (and even better if your company provides some employer funds).  Roth IRA is also fantastic.  These are probably two of my favorite account types.  I would generally say both.  If it’s one or the other, and you know you won’t need access to the funds for a long time, HSA all day.

Taylor L. · Answer

What's your timeframe? Why not both?

The HSA provides a fantastic tax incentive. It seems to me, however, it's a bit tougher to invest the HSA compared to an IRA. I would also remember that these two accounts serve very different purposes.

Should I max out my HSA/IRA or neither?

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