Tax Planning Strategies

First, you should recognize the HSA Health Savings Account is MORE powerful than an IRA, a 401k, or even a Roth IRA!!   Why?  It’s the only account that gives you the “triple tax advantage” or “tax-trifecta” with (1) tax deductible contributions, (2) tax deferred growth, and (3) tax free distributions for medical/dental expenses we all know we’ll have in the future. The HSA allows you to create money with the tax deduction, grow that created money, and then spend all of that money tax free on eligible medical expenses. See our HSA Eligible Expenses Page.

THE HSA “TAX BENEFITS”:

1. HSA contributions are a “front page above the line” 1040 deduction or pre-tax salary reduction.

2. HSA contributions are in ADDITION to your other 401k and IRA/Roth contributions.

3. HSA’s are a pure tax shelter since there are no income limits or earned income requirement.

4. HSA’s can be treated like an IRA after age 65 (avoid 20% penalty, but taxes are due).

5. HSA’s funds rollover each year and do NOT have a “use it or lose it” feature like an FSA.

6. HSA’s do not require you to use your HSA money now, you can reimburse yourself anytime in the future.

7. HSA’s do not have Required Minimum Distributions at Age 70 1/2.

HSA vs. IRA vs. ROTH IRA vs. 401K vs. 529 PLAN

All of us are in a different financial situation, but each of us share the same belief that we need to save for our retirement, college, or certain health related expenses. With so many different vehicles to utilize, which one should I choose?  An IRA, a Roth, a 401k, a 529 college plan, or my Health Savings Account?  What about on the distribution side? Which account should I withdraw money from? Below, we try to provide answers to those questions and common situations.

Which account you contribute to depends on your particular tax situation and what your employer may provide in the form of contributions. Everyone is in a different financial position, so please consult one of our Accountants from the Tax Professionals page. In the meantime, here are a few suggestions to consider an HSA Health Savings Account contribution over the other savings vehicle options:

Should I make an HSA or 401k Contribution?

If your employer has matching 401k contributions, this is something you should take advantage of, but only up to where the contribution level equals the maximum matching level. If you only have a certain amount earmarked for savings, and you have known medical expenses, you may want to divide accordingly to your 401k AND your HSA. If you have the financial means to contribute up to the matching 401k maximum, and you still have money leftover to save; then an HSA plan is probably the next best move for all of the tax advantages mentioned above.
If your employer does NOT have matching 401k contributions, and you have the ability to do a pre-tax salary reduction into an HSA, then you may want to highly consider contributing the maximum amount entirely to an HSA, before considering a 401k contribution. Why? With an HSA, you have access to it in case of medical expenses tax and penalty free immediately. To pay for those same expenses from your 401k would incur income taxes due, maybe a penalty, or a 401k loan lingering for years. Another reason to consider an HSA contribution over a 401k non matching contribution is that they are both treated the same way in and for retirement. The only difference is the age where distributions are penalty free. For an HSA it’s age 65 to avoid the 20% penalty, and for a 401k it’s age 55 or age 59 1/2 depending on if you roll over the funds to an IRA or not. But, as you can see, your HSA contribution can be used in the near future if needed, or be used for retirement also. It’s a two-for-one account.

Which account you contribute to depends on your particular tax situation and what your employer may provide in the form of contributions. Everyone is in a different financial position, so please consult one of our Accountants from the Tax Professionals page. In the meantime, here’s a few suggestions to consider an HSA Health Savings Account contribution over the other savings vehicle options:

Should I make an HSA or IRA/ROTH Contribution?

If you have a limited amount to save, you should highly consider putting that money in your HSA account over your IRA account. Why? Because you’re on a strict budget without much room to spare, and medical expenses are one of those “unexpected” expenses before retirement, or it could be planned expenses like Lasik eye surgery or braces. Either way, if the situation arises, you have access to tax and penalty free money. If everyone is healthy, then the money will not be wasted as it can be used for your health for your older years, or for retirement expenses after age 65. You will use this money at some point in your life.

If you have enough money to save more, it can still be argued that you should max out your HSA contribution up to the limits allowed (see our HSA Contribution Limits page), then start funding your non-matching 401k, IRA’s, Roth IRA’s and 529 plans in that order. 401k’s are a salary reduction and avoid payroll taxes, and reduce income taxes. IRA’s are second in line since they get the same tax break on the way in, and the way out that an HSA brings to the table. Roth IRA’s don’t allow for a tax deduction going in, but tax free distributions on the way out. And with a 529 plan, nobody is certain that your child will go to college, but I’m certain you will retire some day and you will incur medical expenses some day.

Should I Take a Distribution from my HSA or Other Retirement Plan?

Which account you take distributions from depends on your particular tax situation and financial position. Please consult with one of our Accountants from the Tax Professionals page. In the meantime, here’s a few suggestions to consider a distribution from a retirement plan over an HSA plan:

Should I pull money out from my HSA or IRA/401k?

There are many scenarios that can play out here, but we’ll build a case for keeping the HSA intact for as long as possible.  First, the IRS tax code does not mandate that you use your HSA funds when medical, dental and vision expenses arise.  The code allows you to reimburse yourself at anytime in the future for those receipts that you will be keeping close to your vest for years to come. Next, we need to consider your age, whether you are over age 59 1/2, age 65 or age 70 1/2.  Each are minimum ages to avoid penalties on IRA’s, HSA’s and RMD’s (Required Minimum Distributions) respectively.  Lastly, it will depend upon your other income sources and tax bracket to determine which is best each year.

You could consider the following when you’re planning your retirement income:

HSA’s do not have RMD’s – You’re forced to start taking IRA and 401k distributions at age 70 1/2.  It’s better to do it on your own income planning schedule starting at age 59 1/2  while you’re at advantageous or controllable tax brackets .

HSA’s can be used like an IRA after age 65 – It may be better to utilize and exhaust all retirement plan assets first, knowing that you can treat your HSA like an IRA, and rely upon your HSA for retirement expenses with the same tax ramifications.

HSA’s distributions are tax free when reimbursing yourself for eligible medical receipts – Why not use regular after tax money, or your retirement plan money (if low tax bracket) to pay for medical expenses.  Keep the receipt, and reimburse yourself tax free in those years you need tax free income.


WARNING: Total HSA contributions must not exceed the allowable per year maximums, and include employer and personal contributions combined.

WARNING: Distribution options upon death of an HSA owner are not very friendly for NON-spouse beneficiaries who must take an immediate distribution and include the balance of the HSA as income as of the date of death. Only a spouse can roll HSA funds into their own Health Savings Account plan.

Visit our HSA Investment Strategies page to enhance these tax features further.