[2023] HSA vs. Roth IRA: Should You Contribute to Both?

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I've been saving for retirement since I was seventeen years old. From the day I got my first job, I was looking to get ahead so that I didn't need to work forever. Now, only a decade later, I'm fortunate I made the decisions that I made.

But even if you didn't pursue the same unusual path that I did, you still have plenty of options to get ahead too.

Two such ways are to save and invest within an HSA and ROTH IRA. Both are heavily tax-advantaged and provide you a great incentive to prepare for your retirement too.

Today, I'm here to settle the HSA vs. Roth IRA debate once and for all. Which account is better, and should you contribute to both accounts? Let's find out!

What is an HSA?

A Health Savings Account (HSA) is a type of financial savings account that is designed to help Americans insured on high-deductible health plans (HDHPs) to save and pay for qualifying medical expenses, both in the present and the future.

However, in recent years, more attention has been given to using HSAs as a quasi-type of retirement account. This is because, after age 65, you can use the funds for whatever you want, healthcare expense or not. In fact, I save money in my HSA for this very purpose.

I've written about HSAs before, so if you want to learn more about them, check out my piece on whether an HSA is worth it.

What can you use an HSA for?

Typically, HSAs can be used for a huge array of qualified medical expenses, including:

1. Doctor visit copays

2. Prescription copays

3. Inpatient hospital stays

4. Dental procedures and services

5. Vision procedures and services

6. Mental health treatment

7. Durable medical equipment (DME)

8. Preventative care

9. Long-term care

You can find more information in my HSA guide.

HSA eligibility

HSAs are available to those that meet the following eligibility requirements:

• Be covered under a high deductible health plan: More specifically, you must be on a HDHP with an individual deductible of at least $1,450 or a family deductible of at least $2,900 in 2023.

• Have just one health insurance policy: To retain eligibility for an HSA, you can't have a second health insurance policy that is not of a high deductible nature. Exceptions are made, however, for dental, vision, and a couple of other types of insurance.

• Be older than 65 years of age: Once you turn 65, you are no longer eligible to save money in a Health Savings Account. This does not mean, however, that you forfeit the existing funds in your account, if applicable. You can still spend those.

• Not be listed as a dependent on a tax return: Generally, those that are claimed as dependents on a United States federal tax return are not eligible to open or contribute to Health Savings Accounts.

HSA benefits

There are many benefits to saving money in a Health Savings Account, including:

1. Significant tax advantages

2. Control over how money is used

3. A way to lower your total healthcare expenses

1. Tax advantages

HSA savings are triple-tax advantaged from a federal perspective. Your contributions can be made on a pre-tax basis via payroll direct deposit, your investments will grow tax-free, and your withdrawals will also be tax-free, so long as you use funds for qualified medical expenses (or any purpose once you turn 65).

These advantages are too good to pass up.

2. Control over how funds are used

It is important to remember that you retain complete control over how the funds in your HSA account. This holds true even in the event that you switch jobs or opt for new medical coverage on a non HDHP.

Features like this will make it easier for you to budget for your healthcare expenses before they pop up.

3. Lower healthcare expenses

Each dollar that you save in your Health Savings Account gives you the financial power and flexibility to lower your healthcare expenses now or in the future. And with healthcare oftentimes making up the largest chunk of American's retirement budgets, the ability to lower your expenses is critical.

HSA vs. Roth IRA: advantages to each

Now that I've covered many of the details of both HSAs and Roth IRAs, I want to evaluate the similarities and differences between these accounts.

Let's start with the advantages to an HSA.

1. No income eligibility phase-out

Roth IRAs have an income level phase-out, where individuals earning more than $144,000 and couples earning more than $214,000 no longer qualify to make contributions to a Roth IRA.

No income limits apply to HSA accounts, however.

2. No RMDs

Some tax-advantaged retirement accounts require what are known as required minimum distributions, where you'll be forced to take withdrawals once you hit a certain age.

And while Roths don't require RMDs. Traditional IRAs do carry an RMD, though, at age 73, recently raised by the passage of the Secure Act 2.0.

3. Lowers your AGI

If you need/are looking for ways to lower your adjusted gross income this year, an HSA can help you out in ways that a Roth IRA cannot. Traditional IRAs also can lower your AGI, but those earning more than $136,000 as an individual and $228,000 as a couple will lose this perk.

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Next, let's review the advantages of Roth IRAs.

1. More flexibility in retirement withdrawals

If you're not as worried about copays and current medical expenses and are more focused on retirement, Roth IRAs may have an advantage. You'll be able to access your cash federal tax and penalty free at age 59.5, a full 5.5 years earlier than you'll be able to use an HSA for non-medical expenses.

2. More investment options

IRAs generally come with a greater array of investment options for Americans to choose from. And while I see this as a notable pro, just beware that this can lead to confusion for those that aren't as well-versed in the world of investments.

Don't just invest blindly. If you need help, remember to reach out to a qualified investment advisor or professional.

How I balance my HSA and Roth IRA

I'm writing this article from a first-hand perspective. I routinely save in both of these accounts and want to share my thoughts.

When I first opted for a HDHP, which was pretty much all my employer offered for a fair price, I was unenthused. I was used to copays ranging between $5-$25, expenses that are now routinely $50-$150. My prescription prices went up too, from less than $5 per month, to over $25 now.

Needless to say, I was not happy. But, at the time, I had no idea how my HSA could change the trajectory of my financial life. Anyway, here are a few of the principles I use to contribute to both accounts.

I try to max out both accounts

Now, each year, I aim to contribute enough dollars to max out both accounts. Between the $3,850 I can contribute to my HSA and the $6,500 I'm eligible to save in a Roth IRA, this equates to $10,350 per year. A lot of money, but doable.

I split the $3,850 in contributions across the twenty-six pay periods, so I contribute about $150 per pay period into my account.

From a Roth IRA perspective, I do the same thing.

If you can't get as much money saved as you'd like to over the course of a calendar year, keep in mind that you can typically make retroactive contributions for the previous year through April 15th or so (aka Tax Day), so keep this in mind.

I consider my investment options in both

Remember - the real magic in both of these accounts happens when you start to generate investment growth. So, in my mind, I want to know my exact investment choices in each. My Roth IRA offers access to pretty much any stock, bond, mutual fund, or ETF I could ever want to own with zero transaction fees, and I really appreciate this flexibility.

My HSA, on the other hand, only offers a lineup of mutual funds to choose from. But I am willing accept this lower level of flexibility simply because it is advantageous from a tax perspective to do so.

I don't miss out on free money

My full-time employer also contributes $500 on my behalf into my HSA each year. And

But if your employer requires you to contribute a certain amount of money in order to qualify for a Health Savings Account match, I highly recommend that you take advantage of this if able.

To me, it is just like receiving a 401(k) match. It is free money, after all!

Should you contribute to an HSA and Roth IRA?

The million-dollar question. Typically, if you can afford to do so, I recommend that you contribute as much money as possible to your future savings and retirement. Naturally, this does include both your Health Savings Account and your Roth IRA. Oftentimes, I'll hear from Americans nationwide wondering why they should save in an HSA even if they're healthy and have low healthcare expenses.

My answer is always the same.

You simply cannot underestimate the potential benefits to your retirement. Having another "bucket" of money available to you, even if you need to wait until age 65 to use it for non-qualified medical expenses, can absolutely usher in the financial security you want for the rest of your life.

Frequently asked questions

I know you still have questions about the HSA vs. Roth IRA discussion. Here are some answers.

1. Should you max out an HSA?

If you can afford to do so, you are extremely unlikely to regret maxing out your Health Savings Account. Remember - in 2023, you can save up to $3,850 in your HSA, so reaching this maximum is not as daunting as it is with a 401(k), for example.

Any extra dollar that you can afford to save not only offsets your taxable income dollar-for-dollar, but also protects your financial future in the event that you incur expensive medical bills.

Healthcare is really expensive, and some couples may need as much as half a million dollars to cover these expenses in retirement.

2. Should you max out your Roth IRA?

Similar to my thoughts above, if you can afford to max out your Roth IRA this year, you absolutely should. And while you won't reap tax benefits for doing so now, you will in the future.

It's all about that balancing act between current and future cash flow and tax benefits.

3. Which account will lower my taxable income?

If lowering your taxable income is top of mind, then contributing to your HSA should be at the top of your mind. Remember - your contributions will lower your adjusted gross income and lower your taxable income by the amount that you contribute.

Roth IRAs do not lower your taxable income, though Traditionals may, granted you make less than the income cutoff I mentioned earlier.

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