HSA vs IRA: Which is the Smartest Choice in 2024?

Knowing how to invest money in a way that supports your personal goals is important. That’s because finding the best place to invest can provide tax advantages that help you keep more of your hard-earned cash. Picking the best investing and/or savings vehicle requires understanding your options and how they can impact your finances.

Traditionally, people turn to retirement accounts to reduce their tax liability. IRAs (individual retirement accounts) are a common way of saving for retirement outside of what your work may provide. But you may have access to a special account that offers more tax benefits and that many people aren’t taking advantage of.

People with a qualifying HDHP (high deductible health plan) might have access to a type of tax-advantaged account called an HSA (health savings account). Your employer may offer this type of account or you may be able to set one up on your own.

Here’s what you need to know about HSAs and why they might be a better investment choice for you compared with an IRA.

Quick comparison: HSA vs. IRA

	HSA	Traditional IRA	Roth IRA
Eligibility	Must be enrolled in an HSA-eligible HDHP	Must meet income requirements	Must meet income requirements
Tax on contributions	Contributions made pre-tax	Contributions may be tax-deductible	Contributions receive no tax break
Tax on withdrawals	No tax if used for qualified medical expenses	Ordinary income taxes with no penalty after age 59 1/2	None if made after age 59 1/5 and account is five years old
Mandatory withdrawal age	None	Required minimum distributions start at age 72 for most people	None
Early withdrawal penalties	None for qualified medical expenses, 20% for other reasons	Yes, 10%	Yes, 10%
Loans	No	No	No
Income limits	None	Yes, vary depending on your situation	Yes, vary depending on your situation
Contribution limit (for tax year 2023)	Self-only insurance plans: $3,850 Family insurance plans: $7,750 Additional catch-up contribution of $1,000 available for those 55 and older	Those under age 50: $6,500 Additional catch-up contribution of $1,000 available for those 50 and older	Those under age 50: $6,500 Additional catch-up contribution of $1,000 available for those 50 and older
Contribution limit (for tax year 2024)	Self-only insurance plans: $4,150 Family insurance plans: $8,300 Additional catch-up contribution of $1,000 available for those 55 and older	Those under age 50: $7,000 Additional catch-up contribution of $1,000 available for those 50 and older	Those under age 50: $7,000 Additional catch-up contribution of $1,000 available for those 50 and older

Basics of an IRA

There are two general types of IRAs you may be able to use to lower your tax liability now or in the future. These are the traditional IRA and the Roth IRA.

What is a traditional IRA and how does it work?

A traditional IRA is a retirement account you open with a company or financial institution of your choice. A traditional IRA allows you to contribute up to $7,000 if you’re under age 50 or an additional $1,000 if you’re 50 or older in 2024.

If you or your spouse have access to a workplace retirement plan, your IRA contributions’ tax-deductibility is subject to income-based restrictions. If neither you nor your spouse has a workplace retirement plan, your contributions are fully tax-deductible.

With a traditional IRA, your earnings grow tax-free. When you withdraw money in retirement, you then pay regular income taxes. If you withdraw money before age 59 1/2, you must pay a 10% early withdrawal penalty in most cases.

Once you reach age 72, you must start taking required minimum distributions. If you don’t, you face a 50% excise tax on the amount you should have withdrawn.

What is a Roth IRA and how does it work?

A Roth IRA is another type of retirement account you can open outside of your job. The contribution limits are the same as a traditional IRA as long as you don’t fall subject to income limitations. If your income exceeds the limitations, your contribution limit decreases, or you may not qualify to contribute directly to a Roth IRA at all.

 A strategy known as the backdoor Roth IRA may be an option if you exceed the income limit requirements, but it’s best to speak with a professional tax planner or financial advisor if you believe this is your situation.

Contributions to a Roth IRA aren’t tax-deductible, but your earnings grow tax-free. And when you withdraw the money after age 59 1/2, you do not have to pay taxes on the money as long as the account has been open for at least five years. Roth IRAs also benefit from not having an RMD requirement.

Withdrawing money before age 59 1/2 could result in a 10% early withdrawal penalty and paying taxes on earnings, though specific circumstances may allow tax-free and penalty-free withdrawals of certain money within the account before age 59 1/2.

Basics of an HSA

An HSA is an account you can pair with qualifying HDHPs. To qualify, an HDHP must have a deductible of at least $1,500 for individual health insurance plans or $3,000 for family health insurance plans in 2023. In addition, the total out-of-pocket expenses in 2023 can’t exceed $7,500 for an individual health insurance plan or $15,000 for a family health insurance plan.

In 2024, the HDHP deductible must be at least $1,600 for individual health insurance plans or $3,200 for family health insurance plans. While the total out-of-pocket expenses in 2024 can’t exceed $8,050 for an individual health insurance plan or $16,100 for a family health insurance plan.

If you don’t have a qualifying HDHP, you can’t contribute to this type of account. You can, however, keep an old HSA open and allow it to continue growing.

An HSA is not the same as an FSA (flexible spending account) though they have similar names. Money in an HSA will roll over from year to year. In contrast, you must spend the money in an FSA by a particular deadline or you generally forfeit it.

How you hold money in an HSA account

Some HSAs allow you to only save money in a savings account. Others allow you to start investing the funds you set aside after you reach a particular balance. HSAs that enable you to invest provide the best potential growth for your long-term retirement savings because we typically have increasing medical expenses as we age. 

Those needing to access money in the short term may be better off simply leaving the money in an HSA’s savings account feature. If you’re opening an HSA on your own, shop around. Look for a plan custodian that offers low fees for saving and investing money. Some HSA providers charge overly expensive fees for investing the money held in an HSA. This could severely cut into your returns.

HSA contribution rules

Just as an IRA has annual contribution maximums, there are HSA contribution limits as well. You can’t contribute more than $3,850 for individual health insurance plans and $7,750 for family coverage plans in 2023. You can make an extra $1,000 catch-up contribution if you’re age 55 or older.  These limits are $4,150 for individual health insurance plans and $8,300 for family coverage plans in 2024. You can make an extra $1,000 catch-up contribution if you’re age 55 or older. 

You may have the option to contribute pre-tax from your paycheck for HSAs offered as an employee benefit. Contributing these pre-tax dollars will effectively lower your taxable income. For health insurance plans held outside of work, you can contribute money on your own and qualify for a tax deduction for that amount. Either way, your earnings within an HSA account grow tax-free.

Withdrawing from an HSA

You can withdraw money from an HSA at any time, but the only tax-free and penalty-free withdrawal option is the money used for qualifying medical expenses.

Money withdrawn before age 65 for anything other than qualifying medical expenses results in a 20% penalty and requires you to pay income taxes on that money.

The money you withdraw for any purchases at age 65 or older doesn’t require paying the penalty, but you still have to pay income taxes if you use it for something other than medical costs.

Qualifying medical expenses for HSA withdrawals

Qualified medical expenses can be incurred by you, your spouse, dependents you claim on your tax return, and certain others in specific circumstances.

Expenses that would qualify for the medical and dental expenses deduction when you file your taxes will usually count as qualifying medical expenses for HSA purposes. According to the IRS, this means you must incur the costs in the course of “diagnosis, cure, mitigation, treatment, or prevention of disease and for the purpose of affecting any part or function of the body.”

Examples of medical bills you can pay with HSA money include:

• Breast pumps and supplies
• Crutches
• Doctor’s office visits
• Eyeglasses
• Eye exams
• Hospital services
• Laboratory fees
• Menstrual care products
• Over-the-counter products and medications
• Physical therapy
• Prescription drugs
• Speech therapy
• Surgery

In general, you can’t use HSA funds for health insurance premiums. You can use it for:

• Medicare premiums
• Health care coverage other than Medicare supplemental policies once you’re age 65
• Long-term care insurance, subject to limits
• Health care continuation coverage (such as COBRA)
• Health care coverage while receiving unemployment compensation under federal or state law

For a detailed list of eligible expenses, view IRS Publication 502.

Advantages of an HSA over an IRA

In a nutshell, here are the advantages of investing in an HSA vs. an IRA:

• You can use HSA money for non-medical expenses after age 65 by paying taxes, but there is no penalty
• You can use HSA money for non-medical expenses before age 65 if you pay taxes and penalties
• HSAs offer more tax advantages if they are used for qualifying medical expenses: Money in an HSA grows tax-free; HSA contributions qualify for pre-tax treatment or a tax deduction; and you can withdraw HSA money tax-free for qualifying medical expenses
• You may be able to make contributions to a work-sponsored HSA plan with a payroll deduction
• HSAs have no income limitations for contributions
• HSAs have no RMDs

FAQs

Bottom line

An HSA can be a very useful tool for saving and investing money when you’re actively tax planning and figuring out how much to save for retirement. This account type could let you contribute money pre-tax, grow earnings tax-free, and withdraw money income tax-free in retirement when the money pays for qualified medical expenses. This offers even more significant tax savings than traditional and Roth IRAs, as long as you use the money for medical expenses.

Due to the expected high costs of healthcare in the future, and the inevitable fact that we all age, it isn’t unrealistic to think you may need a large balance in your HSA for retirement. If you miscalculate, you could always withdraw the money at or after age 65 for any purpose without paying penalties. You just have to pay income taxes. HSAs offer even more flexibility right now, as well. If you need the money before retirement to cover your qualified healthcare expenses, you could withdraw it tax-free at any age without a penalty.