HSA vs Roth IRA

HSA vs Roth IRA: Which Should You Prioritize In 2024?

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Do you want to retire comfortably and pay for your medical expenses without any stress? There are a number of tax-advantaged accounts that let you save for these goals. Two of these accounts are HSAs and Roth IRAs. We are going to discuss both in detail so that you can decide which one you should prioritize to reach your personal goals.

How do HSAs work?

A health savings account (HSA) is a great way to save pre-tax money for eligible medical costs. The first thing to mention is that you must have a high deductible health care plan (HDHP) to contribute to an HSA.

HSAs have a triple tax benefit that is unheard of in other retirement accounts. This means that the contributions are pre-tax, the growth is tax-free and you can withdraw the money tax-free for qualified medical expenses. You can also withdraw the money after age 65 for any reason but you would then need to pay ordinary income tax on those withdrawals.

You can carry the funds forward each year and you can invest any funds that you don’t need right away. You can also withdraw money from your HSA at any time for medical expenses. HSAs have a lot of benefits that HRAs and FSAs do not have. If you qualify for an HSA, then it can be a powerful retirement savings vehicle (even though it’s not technically a retirement account).

How do Roth IRAs work?

A Roth IRA is an individual retirement account where you contribute after tax dollars. You can invest in an IRA as long as you have earned income. You pay taxes on the money that goes into your Roth IRA and then that money grows tax-free. Once you reach 59 ½, and the account has been open for at least five years, you can take tax-free withdrawals. Roth IRAs are usually best if you think your taxes will be higher in retirement than what they are now. 

You can withdraw your contributions at any time without a penalty, but you cannot withdraw your earnings without a penalty if withdrawn early. However, it’s recommended to leave your contributions in your Roth IRA to take advantage of compound interest.

The annual contribution limit is $7,000 in 2024 ($8,000 if age 50 or older). The IRS does limit who qualifies for a Roth. If you are a high earner then you may be restricted from contributing the full amount each year. 

Is HSA better than Roth IRA?

HSAs and Roth IRAs are both great options to help you achieve your goals. If you qualify for both HSA and a Roth IRA, then it may be worth maxing out both if you can. If you do have to choose between an HSA or a Roth IRA, then HSAs potentially have more advantages.

  • HSAs have a triple-tax advantage. The contributions are tax-deductible, the growth is tax-free and withdrawals are tax-free for qualified medical expenses. An HSA also allows you more flexibility because you take withdrawals now (for qualified medical expenses) and during retirement.
  • Roth IRAs offer tax-free growth. However, the contributions are taxable. But you can take out your contributions anytime without taxes or penalties.

It’s important to look at your unique situation before you decide which option is best for you. A financial planner can help you decide which one is better for your goals.

(Don’t forget to download the guide on ‘Will My Distribution From My HSA Be Tax & Penalty-Free? if you haven’t already).

HSA and Roth IRA pros and cons

ProsCons
HSAYou can deduct your contributions from your gross income

Withdrawals are tax-free as long as they are used for an eligible medical expense

Contributions grow tax-free

You have the option to invest your HSA funds
You must have a HDHP to contribute to an HSA

You can only contribute $4,150 in 2024 for an individual plan or $8,300 for a family plan (if you're 55 or older you can contribute an extra $1,000 on top of those amounts).

Can only use the funds for eligible medical expenses. If you use it for something else then you will be subject to income tax and a 20% additional tax

You need to save receipts to prove that your purchase was eligible
Roth IRAEarnings and qualified withdrawals are tax-free

You can withdraw your contributions at any time without any penalties

You can use your funds during retirement for whatever you want
Contributions are not tax-deductible

Should I max out my HSA or IRA first? 

HSAs and Roth IRAs are both tax-advantaged accounts. The IRS sets a limit on how much you can contribute to both each year. As we said above, HSA may be a better option to max out first since it offers potentially more savings power.  

Should I prioritize my 401(k) or HSA?

It’s generally recommended to prioritize your 401(k) before your HSA if your employer offers a matching program. Once you get your company match, then you should consider maxing out your HSA next. 

For example, let’s say you are able to contribute $7,000 a year across numerous accounts. If your employer matches your 401(k) contribution in full up to $4,000 then it’s recommended to put in the full $4,000 into your 401(k) to get that benefit. After that’s been done, you could contribute $3,000 to your HSA, or divide the remaining up between your Roth IRA and HSA.

Should I prioritize my workplace retirement plan before an HSA or Roth IRA? 

It really depends on your situation but the general best practice is: 

  1. Contribute to any workplace retirement plan that offers a matching contribution such as a 401(k).
  2. Max out your HSA. 
  3. Contribute to other retirement savings such as a Roth IRA, or contribute more to your workplace plan.

HSA vs Roth IRA comparison

HSARoth IRA
EligibilityMust be enrolled in an HSA-eligible HDHPMust meet income requirements
Tax on contributionsContributions made pre-taxNo tax break for contributions
Tax on withdrawalsNo tax if used for qualified medical expensesNone if made after age 59 1/2 and account is five years old
Mandatory withdrawal ageNoneNone
Early withdrawal penaltiesNo penalties for qualified medical expenses, 20% for other reasons10% early withdrawal penalty
Income limitsNoYes
Contribution limit 2024$4,150 for self-only insurance plans; $8,300 for family insurance plans, additional catch-up contribution of $1,000 available for those 55 and older$7,000 for those under age 50; $8,000 for those age 50 and older

Is it worth maxing out HSA?

Yes, it’s worth maxing out your HSA. Healthcare costs are one of the biggest uncertainties that you can face, both while working and in retirement. According to a study by Fidelity, an average retired couple age 65 in 2022 may need approximately $315,000 to cover health care expenses in retirement.

If you don’t have an HSA or an emergency fund, a large medical expense can mean people have to take 401(k) loans, or do early withdrawals, where they incur tax ramifications. If you have an HSA then when medical expenses arise, you have the money to cover them. This means less financial stress.

The amount you can contribute per year is based on whether you have an individual or family health plan. You can also use your HSA as an extra retirement account. If you do have an HSA, then a fiduciary financial advisor can recommend the best way to invest your HSA for long-term growth.

Can you contribute to both an HSA and a Roth IRA?

Yes, you can contribute to both an HSA and an IRA. The HSA contribution limit for 2024 is $4,150 for self-coverage only and $8,300 for family coverage. The Roth IRA contribution limit for 2024 is $7,000 for eligible individuals.

Can I rollover from an HSA to an IRA?

HSA funds can’t be rolled over into an IRA account.

Can I rollover from an IRA to an HSA?

There is a tax rule that allows a one-time tax-free transfer from your IRA to an HSA. This would count towards your annual HSA contribution. It is not technically a rollover but it’s the closest thing to a rollover.

You can also roll your 401(k) into an IRA, and then use that money as a one-time transfer from your IRA to your HSA. However, this may come with tax implications, so it’s important to talk to a credentialed financial advisor before doing this. 

Does contributing to an HSA reduce your taxable income?

Yes, when you contribute to an HSA it reduces your taxable income. You contribute using pre-tax dollars and you can claim your HSA contributions as a tax deduction. 

Save for medical expenses and retirement with an HSA or Roth IRA!

HSAs and Roth IRAs are both great tax-advantaged accounts to help you save for various goals including retirement. It’s important to look at your personal situation before deciding which option is best for you. If you have any questions about financial planning, or if you want to see how we can help you achieve your financial goals, schedule a free discovery call today.

Best Financial Planner Washington DC

Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.

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District Capital is an independent, fee-only financial planning firm. We help professionals and entrepreneurs in their 30s and 40s elevate their finances and maximize their money. We are based in Washington, D.C and we work with people virtually nationwide.

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