Roth IRAs vs. HSAs

As we grow older, lowering our tax burden becomes a more significant part of our lives. Our income should increase every year, and if we don’t take the necessary steps, so will our taxes.

Roth Individual Retirement Accounts, or Roth IRAs, allow us to invest after-tax monies and keep all the principles and gains growing tax-free. 

We can combine Roth IRAs with Series “I” Bonds and municipal bonds to help us manage our taxes burden over the years.

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What are HSAs? However, there are additional methods to lower our tax bill. Health Savings Accounts are triple-tax protected and can be even more valuable to our portfolio than Roth IRAs.

I read the “HSA Owner’s Manual” to gain in-depth knowledge of this powerful investing tool. A Health Savings Account, or HSA, is a “savings/investment” account that connects to a qualified health insurance plan.

The most challenging part of investing in an HSA is becoming HSA-eligible and finding a qualified plan. You cannot open an HSA without attaching an HSA-qualified medical coverage plan.

Many scenarios prevent you from becoming HSA-eligible. For me, having Tricare blocks me from opening an HSA. Please read the book and current regulations to see if you can qualify for an HSA.

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Triple Tax Protected. An HSA is a triple tax-protected account, meaning contributions, growth, and distributions are all tax-exempt. However, you must use distributions for qualified medical purposes to receive the tax exemption.

There are annual limits on contributions you can make annually. However, if you become HSA-ineligible and cannot make contributions, you can always use your account to fund qualified medical expenses.

The power of an HSA. The power of an HSA is growing your nest egg early in life. Medical expenses will become a significant burden towards the end, so having a massive nest egg will greatly assist. 

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You can also pay for your medical expenses in the future. This means you can pay your $1,000 medical bill in 2022 and make a tax-free distribution of $1,000 from your HSA in 2042. This rule can give you tax-free income in the future if you keep your receipts.

There are many ways to leverage your HSA to your benefit if you can get your money into an account. I plan to enroll my two sons as soon as they turn 18 and fund their HSA for as long as they remain eligible.

HSAs vs. Roth IRAs. Both of these tax havens will serve you well. If I had the opportunity, I would fund my HSA first. The main reason is that at age 65, you can withdraw income from your HSA for any reason, but you will pay taxes on the withdrawals. 

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Therefore, at age 65, your HSA is essentially a 401K. If you have medical expenses, you can make tax-free withdrawals; if not, you pay taxes at your personal tax rate. 

For 2022, you can contribute $3,650 into an HSA and $6,000 into a Roth IRA. The Roth is better for estate planning because the money will also be tax-free for your children. 

Another excellent point for HSAs is you can make distributions for qualified medical expenses for anyone on your taxes (your dependants).

If I start an HSA for my son at age 18, he may need the money for his spouse or children later. It will be great for him to have a medical nest egg throughout the expensive 30s and 40s. 

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What to invest in an HSA and Roth IRA. I would invest in the same financial instruments in both accounts—index funds. 

When investing with a time horizon over 20 years, index funds give you a great way to hedge your bets. We don’t know which companies will be around in 30-40 years, so index funds allow us to capture the stock market’s growth. 

I am investing in a custodial brokerage account for my sons (15 and 11). When they turn 18, I can fund their HSAs with this money.

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For a Roth IRA, my sons will need to have earned income from a job to invest in the program. I will prioritize investing in an HSA for a few reasons.

1. The money is tax-free going into the HSA.
2. You can make tax-free distributions at any age, even 18, for medical expenses.
3. My son can use the distributions for anyone he is reasonable for on his taxes.

The money locker. The main thing I don’t like about Roth IRAs and 401Ks is that you lock your money up until 60+ years old.

I prioritize the HSA because you can use your distributions throughout your life. You keep your tax-free status and pay no penalties as long as you are paying for medical expenses.

Also, you can purchase long-term care (LTC) insurance as qualified HSA distributions. If you arrive at the end of life with a large sum of money, you can buy top-rated LTC insurance to assist with medical care until the end. 

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The book “Get Your Ducks in a Row” explains that LTC can be the most expensive part of our lives. Sometimes these facilities cost $6,000-$10,000/month. 

If I can mitigate these expenses early in life by investing in an HSA, plus paying for it tax-free, I’m doing that.

It’s too late for you. Chances are it’s too late for you to invest in an HSA. You already have medical coverage from your work, Medicare, or Tricare.

However, funding HSAs for our children should be a top priority. With our kids in mind, the HSA is a more powerful tool than a Roth IRA.

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Funding a child’s Roth IRA in their 20s is impressive. However, they can’t use the money between ages 18-59 ½. My kids will be paying out of pocket for medical insurance, medical expenses, or keeping a job just for medical coverage.

Having $50,000 in an HSA throughout life, growing at 9%, will be a bigger boon for them. You combine that with maximum deductibles ($7,050 in 2022), and you can see how that money can last a long time. 

Conclusion. I am new to the world of HSAs. I will never be able to contribute to an HSA, nor my wife. However, my kids will have this ability.

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Even better, I can cover them on my Tricare until age 26 (if they are in college), but they can open an HSA under their name. This allows them to double dip and invest as much money into an HSA as possible.

HSAs are confusing, which prevents many people from using them. However, there aren’t many ways to lower your tax burden, especially on a triple tax-protected status.

I encourage all parents to look into HSAs for their children. Hopefully, I can fund both my sons’ HSA and Roth IRAs. We want to maximize the power of compounding early, so they leverage it for the lifetime. Good Luck!

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