Business & Investing
Sponsored by

Roth IRA vs HSA

2,333 Views | 26 Replies | Last: 2 yr ago by Drawkcab
water turkey
How long do you want to ignore this user?
I am maxing out my 401k at work and I want to add another option.

We now have been offered an HSA at work. Should I max out the HSA or create a Roth IRA?

TIA
p-townag
How long do you want to ignore this user?
AG
Make it a goal to do both. That being said, HSAs are triple tax advantaged vs double for the Roth.
water turkey
How long do you want to ignore this user?
That's the goal but right now I'm going to have to pick one.

Can you explain the triple advantage (reduces taxable income, covers out of pocket med expenses and….)?

Thanks
TXTransplant
How long do you want to ignore this user?
Yeah, you should be able to do both (unless there is a financial reason you're not able to). I have both and max out both every year.
TXTransplant
How long do you want to ignore this user?
You can invest the money in the HSA and all growth/earnings is tax-free.
permabull
How long do you want to ignore this user?
AG
If you are under payroll tax cap ($142,800) and can make HSA contributions from payroll deductions, it is way more advantageous than any other retirement account. The money not only goes in income tax free but also FICA tax free which is an additional 6.2% on top of whatever bracket you are in for income tax. HSA money can be withdrawn for non medical after age 65 and taxed the same as 401k so after getting your 401k match its better to max HSA before 401k. (Not to mention you can reimburse yourself tax free for Medicare premiums in retirement from the HSA) There is also no time limit to reimburse yourself for medical expenses from an HSA so you can simply pay out of pocket and save your EOB and receipts and reimburse yourself 5+ years down the road if you need money.

Roth gives you the flexibility of pulling the principle out no questions asked so that is nice but I personally think HSA is the most tax advantage vehicle out there that few are taking full advantage of.
permabull
How long do you want to ignore this user?
AG
water turkey said:

That's the goal but right now I'm going to have to pick one.

Can you explain the triple advantage (reduces taxable income, covers out of pocket med expenses and….)?

Thanks
triple tax free is it goes in tax free, it grows tax free, and comes out tax free as long as its for medical expenses. I argue its almost quadruple tax free if you can contribute from a payroll deduction b/c of the FICA tax savings I mentioned above.
Rydyn
How long do you want to ignore this user?
AG
hypeiv said:

water turkey said:

That's the goal but right now I'm going to have to pick one.

Can you explain the triple advantage (reduces taxable income, covers out of pocket med expenses and….)?

Thanks
triple tax free is it goes in tax free, it grows tax free, and comes out tax free as long as its for medical expenses. I argue its almost quadruple tax free if you can contribute from a payroll deduction b/c of the FICA tax savings I mentioned above.
Also, HSA is advantaged for estate taxes, isn't it?
No one is going to give you the education [power / freedom] that you need to overthrow them.
BenTheGoodAg
How long do you want to ignore this user?
AG
Plus - you can take retirement distributions penalty-free out of an HSA - similar to a Traditional IRA
YouBet
How long do you want to ignore this user?
AG
A couple of other things with HSA....your employer will typically seed your account for you so you get free money.

Once you turn 65 you can pull funds penalty free for any purpose and not just medical and pay tax at your income rate at the time which should be lower.

No RMDs.

It's the almost perfect retirement vehicle and hopefully Congress leaves it alone.
chris1515
How long do you want to ignore this user?
AG
HSAs can be invested in the market through a set of investment options like a 401K. I know at my company though, you have to go in and set that option up and then periodically move funds from the "cash account" where new contributions land, into the "investment account" where it gets invested.
YouBet
How long do you want to ignore this user?
AG
chris1515 said:

HSAs can be invested in the market through a set of investment options like a 401K. I know at my company though, you have to go in and set that option up and then periodically move funds from the "cash account" where new contributions land, into the "investment account" where it gets invested.


Ours was auto sweep. Have you checked if your administrator actually does that?
LostInLA07
How long do you want to ignore this user?
AG
Also I don't think there is a time limit on reimbursing yourself so, if you really wanted to, you could save all of your medical bills from now until you retire and then pull out money tax free up to the amount of total medical expenses you've had up to that point. If someone was diligent enough in record keeping I imagine you'd be able to have a lot of completely tax free income in retirement.
YouBet
How long do you want to ignore this user?
AG
LostInLA07 said:

Also I don't think there is a time limit on reimbursing yourself so, if you really wanted to, you could save all of your medical bills from now until you retire and then pull out money tax free up to the amount of total medical expenses you've had up to that point. If someone was diligent enough in record keeping I imagine you'd be able to have a lot of completely tax free income in retirement.


Yep.
Drawkcab
How long do you want to ignore this user?
chris1515 said:

HSAs can be invested in the market through a set of investment options like a 401K. I know at my company though, you have to go in and set that option up and then periodically move funds from the "cash account" where new contributions land, into the "investment account" where it gets invested.

You're not stuck with whatever HSA your employer opened up for you. You can move the funds to an account that invests them automatically. I use Lively and have them keep a minimum cash balance while sweeping everything else into an investment account.
agdaddy04
How long do you want to ignore this user?
AG
Drawkcab said:

chris1515 said:

HSAs can be invested in the market through a set of investment options like a 401K. I know at my company though, you have to go in and set that option up and then periodically move funds from the "cash account" where new contributions land, into the "investment account" where it gets invested.

You're not stuck with whatever HSA your employer opened up for you. You can move the funds to an account that invests them automatically. I use Lively and have them keep a minimum cash balance while sweeping everything else into an investment account.

How do you do that?
Drawkcab
How long do you want to ignore this user?
agdaddy04 said:

Drawkcab said:

chris1515 said:

HSAs can be invested in the market through a set of investment options like a 401K. I know at my company though, you have to go in and set that option up and then periodically move funds from the "cash account" where new contributions land, into the "investment account" where it gets invested.

You're not stuck with whatever HSA your employer opened up for you. You can move the funds to an account that invests them automatically. I use Lively and have them keep a minimum cash balance while sweeping everything else into an investment account.

How do you do that?

Your HSA is your account. My employer didn't even set one up for me. They recommended a bank to use but I went a different route because that bank didn't allow investing HSA funds. Just open an account somewhere and they can help you transfer the funds from your current account the the new one and start having your employer send your money there instead.

I highly recommend Lively at https://livelyme.com/

They offer two investment options - an investment account at TD Ameritrade or at Denevir. The options at Denevir are quite limited but they can manage it for you for half a percent fee. If you want more flexibility the options at Ameritrade are basically unlimited. You can buy whatever you could with one of their normal brokerage accounts.

I went with Denevir until my balance gets a little higher and I don't want to pay that half a percent fee then I'll probably switch it over. They've done ok for me though. I'm up 19.3% all time but I recently had to sell some to pay some medical bills. It hurt but I guess that's what it's there for.
chris1515
How long do you want to ignore this user?
AG
Interesting. I'll look into that. But, that feels like it would be too complicated for our hr/payroll folks to execute.
YouBet
How long do you want to ignore this user?
AG
I'm not sure this is true with every company. My company had a dedicated administrator and there was no option to use anyone else.

You either opted into that company or the company didn't play ball with you on HSA. I guess you could decline employer coverage and open your own.
permabull
How long do you want to ignore this user?
AG
Your employer might have one set up but I don't think they can lock it down the way they can 401ks. You should be able to roll the HSA money over once every 12 months so you might be able to set your own up with a better brokerage firm and just roll the funds over every 12 months.
TwoMarksHand
How long do you want to ignore this user?
AG
This is my situation. About to do a yearly transfer to Fidelity from Optum. Optum sucks and charge the tar out of you for anything and everything.
YouBet
How long do you want to ignore this user?
AG
TwoMarksHand said:

This is my situation. About to do a yearly transfer to Fidelity from Optum. Optum sucks and charge the tar out of you for anything and everything.
They don't suck. They f'ing suck donkey balls and need to be out of business.

It took me four months and calls to senior leaders at my former employer to get my money transferred from Optum to Fidelity. They have no idea what the hell they are doing.
Drawkcab
How long do you want to ignore this user?
chris1515 said:

Interesting. I'll look into that. But, that feels like it would be too complicated for our hr/payroll folks to execute.

They should just need a routing number and account number just like direct depositing your paycheck.
bigfooticus
How long do you want to ignore this user?
What is the definition of HSA eligibility if you have been employed the entire year but just now open an HSA to fund it?
Are you able to contribute the max from after tax to capture some of the tax benefits without penalty? Or will it be have to be prorated?

I can't find a clear answer online.
I have met all the eligibility criteria for 2021.
TIA
permabull
How long do you want to ignore this user?
AG
If you have been in an HSA eligible healthcare plan all year I think you can fully fund it for the year. IRS only asks how much you contributed this year and if you were on the plan all year, I don't think they care when you actually opened the account. I would call the firm you plan to open an account with and take their word for it over mint though.
deadbq03
How long do you want to ignore this user?
AG
bigfooticus said:

What is the definition of HSA eligibility if you have been employed the entire year but just now open an HSA to fund it?
Are you able to contribute the max from after tax to capture some of the tax benefits without penalty? Or will it be have to be prorated?

I can't find a clear answer online.
I have met all the eligibility criteria for 2021.
TIA
I don't have a link for you at the moment but I investigated this a month ago because I moved from a family plan to individual. And yes, it's not super easy to find info on plan switching.

You have two choices when things change:
1) You can choose to prorate, by month. So for example, if your plan started in October, you'd have 3 months left in the year so your limit would be $900 individual, $1,800 family.

2) You can choose to go off whatever you're eligible for in December and therefore make the full annual contribution for that plan; however, there's a 12 month period where you must meet those same conditions that spans into the next year. I forget the technical term for this period, but basically, if you choose to take the full-year option, but then you quit your job in February and take another job with insurance that doesn't qualify for HSA, you're going to get penalized (can't remember what the penalty is).

Also, it's worth noting while I'm discussing technicalities I learned, that while the actual HSA plans are individual, if both you and your spouse have jobs that make you eligible to contribute to HSA, your whole family's max contribution can't exceed the family limit. So if you're on your plan and your wife and kids are on her plan, if you max out your individual contribution, she can only max out the individual on hers even though as far as her work is concerned, they'd let her contribute the full family limit to her plan.

This is one of the many things where tons of people are out of compliance and have no idea and the IRS never catches it until there's an audit.
bigfooticus
How long do you want to ignore this user?
hypeiv said:

If you have been in an HSA eligible healthcare plan all year I think you can fully fund it for the year. IRS only asks how much you contributed this year and if you were on the plan all year, I don't think they care when you actually opened the account. I would call the firm you plan to open an account with and take their word for it over mint though.


That's what I am leaning towards on this since I met the criteria all calendar year and will through end of year.

Thanks!
Drawkcab
How long do you want to ignore this user?
deadbq03 said:

bigfooticus said:

What is the definition of HSA eligibility if you have been employed the entire year but just now open an HSA to fund it?
Are you able to contribute the max from after tax to capture some of the tax benefits without penalty? Or will it be have to be prorated?

I can't find a clear answer online.
I have met all the eligibility criteria for 2021.
TIA
2) You can choose to go off whatever you're eligible for in December and therefore make the full annual contribution for that plan; however, there's a 12 month period where you must meet those same conditions that spans into the next year. I forget the technical term for this period, but basically, if you choose to take the full-year option, but then you quit your job in February and take another job with insurance that doesn't qualify for HSA, you're going to get penalized (can't remember what the penalty is).

It's a complicated term called Last-Month Rule.
Refresh
Page 1 of 1
 
×
subscribe Verify your student status
See Subscription Benefits
Trial only available to users who have never subscribed or participated in a previous trial.