You may have heard that the Health Savings Account (HSA) is the ultimate retirement account because it’s triple tax-free. Contributions go in tax-free. The balance grows tax-free. Withdrawals are again tax-free to pay for accumulated out-of-pocket medical expenses.
I have an HSA but it’s my least favorite retirement account. My HSA has the lowest balance among all my accounts. It’s not always worth it to contribute to an HSA.
Low Contribution Limit
The first problem with the HSA is that it has a low contribution limit. Here are the contribution limits of different account types in 2024 (double these for a married couple):
|Before Catch-up||With Catch-up|
|401k/403b/457||$23,000||$30,500 (age 50+)|
|IRA/Roth IRA||$7,000||$8,000 (age 50+)|
|HSA||$4,150||$5,150 (age 55+)|
The HSA contribution limit is only slightly more than half of the IRA contribution limit. It’s less than 20% of the 401k/403b/457 contribution limit. The catch-up contribution for HSA starts at age 55, not age 50 as in a 401k or an IRA.
Triple tax-free is good but you just can’t put as much into the HSA. The 401k/403b/457 plan and the Traditional or Roth IRA should still be your primary retirement accounts.
Requires High Deductible Health Insurance
You also can’t contribute to an HSA just because you want to. You must be covered under a High Deductible Health Plan (HDHP) without any other coverage. Because most people get health insurance through their employer, this depends on the employer offering an HSA-eligible health insurance plan. If you get health insurance from the ACA marketplace, this depends on insurance companies offering HSA-eligible plans in your area. If you’re on Medicare, you can’t contribute to an HSA.
You don’t have the option to contribute to an HSA if you don’t have the right health insurance.
This requirement to be covered under only a High Deductible Health Plan gets complicated when a married couple has different health insurance or when health insurance changes mid-year due to job change, marriage, divorce, childbirth, enrolling in Medicare (sometimes retroactively), etc., etc. See HSA Contribution Limit For Two Plans Or Mid-Year Changes. Don’t get me started on some employers having a “plan year” that doesn’t start on January 1. That brings extra wrinkles too.
High Deductible Health Insurance Pays Less
Having a high deductible means your health insurance pays less. It works if you’re healthy with low healthcare expenses. It can also work if you have high healthcare expenses but the premiums on the high-deductible plan are much lower. You use the money saved from the premiums to pay for the higher out-of-pocket expenses.
This tradeoff between lower premiums and higher out-of-pocket costs may not always work out in favor of a high-deductible plan. You have to do the math. I have a spreadsheet in Do The Math: HMO/PPO vs High Deductible Plan With HSA. If a low-deductible plan makes more sense for your expected healthcare expenses, you may be better off foregoing the HSA.
Even if your employer or the ACA marketplace offers an HSA-eligible plan and you have low healthcare expenses, the HSA-eligible plan may not have your doctors in the network. Then you face the dilemma of switching doctors for the whole family just to contribute to the HSA or continuing with the same providers out of network and not getting discounts from negotiated rates.
High Deductible ≠ HSA-Eligible
An HSA-eligible high-deductible plan has specific definitions. Just because the deductible is high doesn’t mean the plan is automatically HSA-eligible.
Insurance companies sometimes “enhance” their high-deductible plans to make them not HSA-eligible. The small “enhancements” ruin your opportunity to contribute to an HSA.
I’m facing this situation next year. Here are the high-deductible plans I see from the ACA marketplace for the two of us:
|Current Plan||New Plan||New HSA Plan|
|Office Visit||Must meet deductible first||$45 primary care|
|Must meet deductible first|
|Monthly Premium||$1,117||$1,282 (+15%)||$1,612 (+44%)|
Our current plan is HSA-eligible. We pay everything except preventive care out of pocket because we have little chance of meeting the $15,000 deductible.
The new plan for next year raises the deductible and the out-of-pocket maximum by another 20%, which we don’t expect to come even close. It throws in some Day 1 coverage for office visits. We’ll pay a $45 co-pay to see a primary care doctor or a $95 co-pay to see a specialist before meeting the deductible. This is worth something but it makes the plan not HSA-eligible (the out-of-pocket maximum is also too high to qualify).
If we still want to contribute to the HSA, the premium for an HSA-eligible plan is $495/month higher than this year, and it’s $330/month higher than the premium for the non-HSA plan. Paying almost $4,000 more for the HSA-eligible plan takes away the tax benefits from contributing to an HSA.
Triple tax-free is great but a lot of things must line up to obtain HSA’s tax benefits. You must have an HSA-eligible health insurance plan as a choice from your employer or the ACA marketplace. The HSA-eligible plan has to cover the right doctors and facilities. The higher deductible has to make sense for your expected healthcare expenses. The premium has to be not so much higher than a non-HSA plan as to blow out all the tax benefits. These practical considerations are often glossed over when people are excited about HSA’s tax benefits.
When the stars line up, go ahead and contribute the maximum to the HSA. The HSA contribution limit is still low but it’s better than nothing.
The HSA is my least favorite retirement account because things don’t always line up. The tax benefits are easily negated by other factors. I’m not going to pay $4,000 more for health insurance only for the sake of putting $8,300 into the HSA.
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