Are HSAs the New Roth IRA?

One of the most common questions I get is whether someone should open a Roth 401(k) or a Traditional 401(k). The same goes for Roth IRAs & Traditional IRAs.  

I’ve covered the topic in the past in To Roth or Not to Roth and What’s the Difference Between a Roth IRA & Traditional IRA.  However, I get asked about Health Savings Accounts (HSAs) much less frequently. 

If I had to paint in very broad strokes, I can make general statements that will apply to most people:

  • Unless you are in a mega-high tax bracket, you are probably paying close to the same tax rate now that you will be in retirement—especially if tax rates go up in the future.
  • The younger you are, the more time your money can compound tax-free in a Roth and/or HSA.
  • Even if you are 50 years old, your Roth and HSA “buckets” could compound for another 40 years as you live off your pre-tax assets first.

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Honestly, when it comes down to it, a post-tax is just better for long term savings for many. So, why aren’t they more broadly used?

Because… you don’t get the current tax deduction. And THAT is a very real prohibitive factor for many people. Sometimes you just can’t take the hit to your current budget in order to give up that tax deduction. I get it.

So, what can be done? Well, if you have access to a Health Savings Account, consider the following suggestions:

  1. Reduce your Traditional retirement contributions – At LEAST contribute up to the employer match in your 401(k). 
  2. With the extra dollars made available, consider maxing out your Health Savings Account. In 2024, for singles, that is $4,150 and for families, it is $8,300. HSAs are available to those only who have high-deductible health insurance plans (HDHPs).

The result? You still get to take a tax deduction for BOTH sets of contributions! You don’t have to suffer the current pain of selecting the Roth. However, you get the benefit of your HSA growing tax free for decades just like a Roth. If it ends up that you overfunded your HSA for healthcare needs in the future, you can use the HSA as a Traditional IRA style asset after age 65.  

So, you were able to get the same long-term tax-free growth benefit of the Roth IRA /401(k) the same current tax break as the Traditional IRA/401(k). 

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There is a whole list of disclosures that I could include about how this isn’t for everyone, so ask your advisor… you know the drill. I suppose the point of this blog is not to make a recommendation, but to highlight the fact that a Health Savings Account is not an afterthought. They should be viewed as being a core part of your savings and financial plan if applicable. 

 So… do your research, talk with your financial advisor, and think very seriously about how to get post-tax (Roth) assets in your life.