Author Topic: HSA contribution or Roth IRA?  (Read 4320 times)

fmzip

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HSA contribution or Roth IRA?
« on: November 22, 2013, 09:18:14 AM »
So I've maxed my 401K out this year. Now I need to decide if I should put $3250 into my HSA (Vanguard Index Funds) or put $3250 into a Roth IRA

I'm not using the funds in my HSA for medical bills, I'm simply using it as a growth vehicle. Since I am 50% shareholder, the $3250 I believe is handled differently tax wise.

Any suggestions as to which is the better approach for me?

matchewed

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Re: HSA contribution or Roth IRA?
« Reply #1 on: November 22, 2013, 09:44:32 AM »
Would the 3250 of tax deferred savings put you in a lower taxable bracket or otherwise be advantageous? What are your goals for this money other than a "growth vehicle" what's the end goal for it and does it match up with your FIRE plan (assuming this is a FIRE plan)?

fmzip

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Re: HSA contribution or Roth IRA?
« Reply #2 on: November 22, 2013, 11:16:05 AM »
It's doesn't put me in a lower bracket and both would be simply for a growth vehicle.

I haven't figured out when we can retire. I need help with that as well.





Iron Mike Sharpe

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Re: HSA contribution or Roth IRA?
« Reply #3 on: November 22, 2013, 11:57:29 AM »
The HSA has two beneifts that the Roth does not have:

1)  HSA money completely avoids the FICA tax rate of 7.65%.  Unless I am mistaken, if you withdraw for income after 65%, you will only pay income tax on it.  Your Roth money is taxed with income and FICA tax when you earn it. 

2)  If you use the HSA money at any point in time for medical expenses, you avoid any income tax on it.  You can use it to pay for Medicare premiums.  This money will not be taxed when you contribute it to your HSA, it then compunds over time, and then if you use it for medical costs, it is not taxed then.  The tax advantages of this are freaking awesome.


The disadvantage is you can't use it for income until you are 65.  But, if I could only do one or the other, it would be the HSA.  I will have health care costs at some point in time. The tax advantages are too good to pass up.


Mississippi Mudstache

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Re: HSA contribution or Roth IRA?
« Reply #4 on: November 22, 2013, 12:42:11 PM »
1)  HSA money completely avoids the FICA tax rate of 7.65%.  Unless I am mistaken, if you withdraw for income after 65%, you will only pay income tax on it.  Your Roth money is taxed with income and FICA tax when you earn it. 

I'm no expert, but I believe this particular benefit only applies if the HSA is funded via payroll deduction. However, the tax-free in, tax-free out advantage, is reason enough to contribute to the HSA.

matchewed

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Re: HSA contribution or Roth IRA?
« Reply #5 on: November 22, 2013, 01:20:33 PM »
1)  HSA money completely avoids the FICA tax rate of 7.65%.  Unless I am mistaken, if you withdraw for income after 65%, you will only pay income tax on it.  Your Roth money is taxed with income and FICA tax when you earn it. 

I'm no expert, but I believe this particular benefit only applies if the HSA is funded via payroll deduction. However, the tax-free in, tax-free out advantage, is reason enough to contribute to the HSA.

I believe that if you contribute post tax then you can reduce your taxable income the following year.

Mississippi Mudstache

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Re: HSA contribution or Roth IRA?
« Reply #6 on: November 22, 2013, 01:39:30 PM »
1)  HSA money completely avoids the FICA tax rate of 7.65%.  Unless I am mistaken, if you withdraw for income after 65%, you will only pay income tax on it.  Your Roth money is taxed with income and FICA tax when you earn it. 

I'm no expert, but I believe this particular benefit only applies if the HSA is funded via payroll deduction. However, the tax-free in, tax-free out advantage, is reason enough to contribute to the HSA.

I believe that if you contribute post tax then you can reduce your taxable income the following year.

HSA deposits count as an above-the-line tax deduction for the year in which you make the contributions, but they don't reduce you FICA wages unless they are taken from your paycheck.

fmzip

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Re: HSA contribution or Roth IRA?
« Reply #7 on: November 22, 2013, 05:53:29 PM »
The HSA is deducted at payroll.

I agree, loading up the HSA account for the inevitable medical expense seem the way to go.

For anyone needing to setup an HSA, check out HSA administrators. They offer a variety of Vanguard funds.

So just to throw a curve ball, if it was $3250 more into the 401K instead of the HSA, would the answer be different?

JR

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Re: HSA contribution or Roth IRA?
« Reply #8 on: November 23, 2013, 07:26:25 AM »
So just to throw a curve ball, if it was $3250 more into the 401K instead of the HSA, would the answer be different?

I would go with the HSA personally. In my state HSA contributions through payroll save over 10% in FICA, state income, and UE taxes. You can also save all of your medical receipts and allow the money to grow tax free and take it out in a later year (when you are FI for example). Even if we would never have any medical bills and we have to wait until 65 to access the money I just can't turn down that extra $600+ in FICA/state tax savings.

ender

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Re: HSA contribution or Roth IRA?
« Reply #9 on: November 23, 2013, 07:57:10 AM »
Imo, the HSA is one of the most wonderful savings vehicles in the world, because you get nearly an immediate 10% return simply by putting money into it (as others have said b/c of the lack of taxes on it).

My biggest thing is I have no interest in managing or tracking all my receipts to withdraw later, and since I have a debit card specifically for my HSA.... this is what I generally do rather than collecting receipts.


garg33

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Re: HSA contribution or Roth IRA?
« Reply #10 on: November 24, 2013, 12:07:31 AM »
Using the HSA debit card does not absolve you of the need to collect and save receipts in case you are ever audited by the IRS.