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 | |
|---|---|---|---|
| Deductible | $15,000 | $18,300 | $16,100 |
| Out-of-Pocket Maximum | $15,000 | $18,900 | $16,100 |
| Office Visit | Must meet deductible first | $45 primary care $95 specialist | Must meet deductible first |
| HSA-eligible | ✔️ | ❌ | ✔️ |
| 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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Bob says
Our family HSA was <1% of net worth and the investment options at the time were limited. It made sense to me to just spend the money on eligible expenses and simplify my life by having one less financial account.
Frugal Professor says
Good post. Luckily for me, the QHDHP is the logical choice through my employer, so I’m not making any compromises when choosing it. As with many Bogleheads, I pay out of pocket for medical expenditures and am deferring reimbursement for some future date hopefully decades into the future. Anything left over will help fund Medicare premiums, which my boss has shown me will easily exhaust even modest-sized HSAs in a decade or so.
Fred says
Marking
Craig says
On the other hand, if two plans–one HSA-compatible and the other not–have similar levels of coverage, would it be fair to characterize the HSA-compatible one as worth (HSA contribution limit) x (marginal tax bracket) more? For me this comes out to about $1800 ($8300 x 22%). Presumably I’ll eventually use the money tax-free on medical expenses. Plus I get tax-free growth until then.
Harry Sit says
It’s worth a little more than that because after you take the tax deduction, it’s still equivalent to a Roth account, which is worth more than a taxable account. That said, $1,800, maybe a little over $2,000 after you take into account the Roth effect, is still a far cry from the $4,000 in extra health insurance premium in my situation. Plus I’ll also have to pay more for office visits.
Scott in AZ says
Due to your HSA premiums being jacked up so much, this all makes sense. In my case, married, 1 dependent, the HSA eligible plan in the marketplace is the second lowest premium of all the plans available at $1,324/mo pre-subsidy. The next lowest is only $14/mo cheaper, has a deductible of $18k vs $12.4k and is NOT HSA eligible. For my particular tax situation, the max HSA contribution, saves 25% in taxes or $218/mo bringing my net premium before subsidy of $1,106. The tax situation is particularly tricky because in my case, the HSA deduction helps to avoid the phase out of the education tax credit. Moral of this story is that the choice is highly dependent on your tax situation, your location and your health situation.
Jim says
Same. HSA contribution allowed me to increase my IRA to Roth conversion by a corresponding amount without hitting the next IRMAA cliff
Harry Sit says
Maybe you’re talking about a spouse making the HSA contribution? IRMAA is on Medicare. You can’t contribute to HSA when you’re on Medicare.
Jim says
Oh, right. I wasn’t very clear. Sorry. I am now on Medicare and not contributing to my HSA. Before I joined Medicare, the HSA contribution reduced my AGI. In the two years before I joined Medicare, this also allowed me to avoid an eventual increase in IRMAA penalties.
Jim says
There’s additional bookkeeping requirements for residents in CA (and maybe other states). CA does not allow a deduction and taxes dividends and realized gain even if these are not taken out of the HSA. Fortunately, Fidelity keeps track of cost basis so I won’t overpay CA income tax when I eventually withdraw the funds.
Elizabeth says
>>>the HSA-eligible plan may not have your doctors in the network
This information appears to be incorrect. It’s the same network but what you pay vs. insurance changes. It makes no difference to the doctor’s office or the insurance network.
Harry Sit says
Let me give you a real example. My employer used to offer a Kaiser HMO plan and an Anthem PPO plan. Many employees chose Kaiser because it was less expensive and it had $0 deductible. Then the employer added an Anthem high-deductible plan. The Kaiser plan was the same as before. If you had Anthem before, then it was the same network but if you had Kaiser, the Anthem high-deductible plan didn’t cover Kaiser doctors or facilities. You would’ve had to switch doctors to use the high-deductible plan or choose the Anthem high-deductible plan and keep seeing Kaiser doctors out of network.
MF says
Harry,
Good post. I came to the same conclusion when I looked at the HSA and non-HSA plans offered on the Exchange. However, further digging uncovered that the same company that offered the more economical non-HSA plan also offered an HSA plan off-exchange when purchased directly from them. The tax savings from HSA was greater than the subsidy I’d receive if I purchased on Exchange.
You may want to check if the insurance companies you are considering offer off-exchange HSA plans that may work out better for you.
Craig says
Same here. My current insurer doesn’t offer any HSA plans on the exchange in my county, but they do in other counties in my state. However they offer practically the same HSA plan, but not on the exchange. I really wish I fully understood the reasoning. I don’t love the idea of buying a plan off the exchange because if your income comes in lower than expected, you’re out of luck in terms of subsidies.
Harry Sit says
I haven’t thought of checking off-exchange policies. The same insurance company does offer an HSA plan off-exchange that’s somewhere in between the two marketplace plans. It’s less expensive than the on-exchange HSA plan but it’s more expensive than the non-HSA plan. While gaining the HSA deduction is attractive, I have the same concern as Craig. I’ll stay with a marketplace plan to keep my options open with regard to the premium tax credit.
While looking at off-exchange plans, I read in the fine print that marketplace plans must include pediatric dental and off-exchange plans don’t have to include it. I can’t imagine that pediatric dental is that expensive to jack up the price of marketplace plans but maybe marketplace plans must also include something else that many people don’t really need.
Mbk says
I’m on a low deductible ACA plan/low out of pocket costs, and keep hearing I should change to HSA plan. However, next year I will need 2 surgeries, so a high deductible plan will have me paying a large chunk of medical bills. To me, an HSA wouldnt make sense as any investment would be offset by paying big medical bills. Am I right? The non-subsidy ACA plans mo premiums cost nearly the same for HSA vs low deductible.
MF says
With two surgeries, you are likely to hit the out of pocket maximum. Which one has lower out of pocket maximum? What is the total of premium + out of pocket maximum for each plan? That should tell you which one is cheaper in out of pocket maximum scenarios.
mark says
Couple additional items missing in the article:
Premium for conventional PPO plan are paid before taxes if working for an employer. This can be a significant tax break if someone is in the 24% or higher tax bracket.
HDHP/HSA plans aren’t eligible for FSA/DCSA. For a family with young kids in daycare, they could easily have over $7500 in FSA/DCSA (which is deducted before taxes). This is a huge cost reduction and often overlooked when folks compare HDHP vs PPO.
Harry Sit says
Choosing an HDHP/HSA doesn’t make you ineligible for the dependent care FSA. Some employers also offer a limited-purpose FSA for dental and vision, which can be used in conjunction with the HDHP/HSA.