HSA vs 401k Roth Conversions

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Russ15
Posts: 11
Joined: Thu Jun 20, 2019 4:03 pm

HSA vs 401k Roth Conversions

Post by Russ15 » Thu Nov 14, 2019 3:24 pm

I just found out I am eligible for an HSA and I know it has awesome tax benefits. I am struggling with the idea that I am not able to tap into the money I am contributing aside from qualified medical expenses since my family and I are all young and in good health. I'm also hoping to retire or at most go part time in the next 7-8 years.

Maxing out my 401k, with the intent to do roth conversions would allow me to access that money after each 5 year time frame, whereas I would be stuck till 65 on the HSA. Current plan is to contribute ~ 1k in the HSA per year and max out the 401k, later doing roth conversions.

Am I missing something here given my timeline? Thanks in advance.

lakpr
Posts: 3095
Joined: Fri Mar 18, 2011 9:59 am

Re: HSA vs 401k Roth Conversions

Post by lakpr » Thu Nov 14, 2019 3:41 pm

Remember that even if you retire, you can pay Medicare premiums (if older than 65) or ACA coverage / COBRA (if younger) using the HSA money. (I am wrong about being able to pay for ACA/COBRA, see 02nz's post below). Tax free going in and tax free coming out.

Think of it as an additional Roth account, except with lower limits: only $7k for the entire family, $3500 for the single person. If you see the value in Roth, those same arguments apply to HSA as well.
Last edited by lakpr on Thu Nov 14, 2019 5:15 pm, edited 2 times in total.

Topic Author
Russ15
Posts: 11
Joined: Thu Jun 20, 2019 4:03 pm

Re: HSA vs 401k Roth Conversions

Post by Russ15 » Thu Nov 14, 2019 4:01 pm

lakpr, thanks I do remember that benefit that you can pay for HC options using the HSA money.

My wife does plan to continue working after I cut back/retire so our medical coverage would remain. I'm 33 and definitely see the value in thinking of way down the line, just hard to see that marker at my current distance. I am however not naive enough to think I will have my health indefinitely.

02nz
Posts: 2560
Joined: Wed Feb 21, 2018 3:17 pm

Re: HSA vs 401k Roth Conversions

Post by 02nz » Thu Nov 14, 2019 4:01 pm

lakpr wrote:
Thu Nov 14, 2019 3:41 pm
Remember that even if you retire, you can pay Medicare premiums (if older than 65) or ACA coverage / COBRA (if younger) using the HSA money. Tax free going in and tax free coming out.
You can't use HSA to pay for ACA coverage in most cases. From irs.gov:

Insurance premiums. You can’t treat insurance premiums as qualified medical expenses unless the premiums are for:
- Long-term care insurance.
- Health care continuation coverage (such as coverage under COBRA).
- Health care coverage while receiving unemployment compensation under federal or state law.
- Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).

02nz
Posts: 2560
Joined: Wed Feb 21, 2018 3:17 pm

Re: HSA vs 401k Roth Conversions

Post by 02nz » Thu Nov 14, 2019 4:06 pm

Russ15 wrote:
Thu Nov 14, 2019 3:24 pm
I am struggling with the idea that I am not able to tap into the money I am contributing aside from qualified medical expenses since my family and I are all young and in good health. I'm also hoping to retire or at most go part time in the next 7-8 years.

Maxing out my 401k, with the intent to do roth conversions would allow me to access that money after each 5 year time frame, whereas I would be stuck till 65 on the HSA. Current plan is to contribute ~ 1k in the HSA per year and max out the 401k, later doing roth conversions.
In addition to being able to pay for Medicare premiums out of the HSA, from age 65 you can draw from the HSA like a traditional IRA, paying normal income taxes on the distribution. (Not sure if that's what you meant about "stuck till 65" or if you meant Medicare premiums.) That means contributing to the HSA is at least as valuable as to a tax-deferred 401k, often much more valuable. So after the getting the full employer match, if you can't afford to max the 401k and the HSA, priority should be on the HSA.

surfstar
Posts: 1852
Joined: Fri Sep 13, 2013 12:17 pm
Location: Santa Barbara, CA

Re: HSA vs 401k Roth Conversions

Post by surfstar » Thu Nov 14, 2019 4:18 pm

If you plan to retire at 40 - shouldn't you be able to max your 401k and your HSA, along with Roth?
Start keeping any medical bills/receipts. You'll be able to tap into the HSA at any time with them. You've got 7-8 years to start added up all the small things.

Topic Author
Russ15
Posts: 11
Joined: Thu Jun 20, 2019 4:03 pm

Re: HSA vs 401k Roth Conversions

Post by Russ15 » Thu Nov 14, 2019 5:06 pm

02nz wrote:
Thu Nov 14, 2019 4:06 pm
In addition to being able to pay for Medicare premiums out of the HSA, from age 65 you can draw from the HSA like a traditional IRA, paying normal income taxes on the distribution. (Not sure if that's what you meant about "stuck till 65" or if you meant Medicare premiums.) That means contributing to the HSA is at least as valuable as to a tax-deferred 401k, often much more valuable. So after the getting the full employer match, if you can't afford to max the 401k and the HSA, priority should be on the HSA.
The "stuck till 65" was just regarding the ability to take large chunks out at a time before 65 (aside from medical expenses) without significant penalty. I contribute to a pre-tax 457 so I like the benefit of maxing this account to pull from without the 10% penalty when the time comes. I do however have a tIRA which is where I was planning on the doing the Roth conversions when necessary. My wife only has a 401k so when she leaves her current employer or stops working that would also be able to be converted early if necessary. I'm certainly not arguing that an HSA is not a great retirement vehicle... even if only used for medical expenses. My focus was really on early access and whether those that would need to do conversions would be better suited doing a 401k/tIRA ahead of an HSA for that purpose.

surfstar wrote:
Thu Nov 14, 2019 4:18 pm
If you plan to retire at 40 - shouldn't you be able to max your 401k and your HSA, along with Roth?
Start keeping any medical bills/receipts. You'll be able to tap into the HSA at any time with them. You've got 7-8 years to start added up all the small things.

Starting next year I will be able to max out the 457 and an HSA. Next year I am shooting to max my 457 and the wife's 401k. After that I have to decide on the tIRA vs HSA order then down to taxable account.
Last edited by Russ15 on Thu Nov 14, 2019 5:17 pm, edited 1 time in total.

User avatar
FiveK
Posts: 7859
Joined: Sun Mar 16, 2014 2:43 pm

Re: HSA vs 401k Roth Conversions

Post by FiveK » Thu Nov 14, 2019 5:06 pm

Russ15 wrote:
Thu Nov 14, 2019 3:24 pm
I'm also hoping to retire or at most go part time in the next 7-8 years.
...
Am I missing something here given my timeline? Thanks in advance.
surfstar wrote:
Thu Nov 14, 2019 4:18 pm
If you plan to retire at 40 - shouldn't you be able to max your 401k and your HSA, along with Roth?
Had (I think) the same reaction as surfstar: if $57K or so - the amount that $7k/yr invested at 5% for 7 years - will make a significant difference in your ability to retire, that seems a risky retirement strategy.

Topic Author
Russ15
Posts: 11
Joined: Thu Jun 20, 2019 4:03 pm

Re: HSA vs 401k Roth Conversions

Post by Russ15 » Thu Nov 14, 2019 5:16 pm

It won't have any effect. My focus was really on early access and whether those that would need to do conversions would be better suited doing a 401k/tIRA ahead of an HSA for that purpose.
Last edited by Russ15 on Thu Nov 14, 2019 5:17 pm, edited 1 time in total.

lakpr
Posts: 3095
Joined: Fri Mar 18, 2011 9:59 am

Re: HSA vs 401k Roth Conversions

Post by lakpr » Thu Nov 14, 2019 5:16 pm

02nz wrote:
Thu Nov 14, 2019 4:01 pm
You can't use HSA to pay for ACA coverage in most cases. From irs.gov:
Thanks!! Corrected my post above. Unaware that we can't use HSA for ACA coverage.

User avatar
1789
Posts: 337
Joined: Fri Aug 16, 2019 3:31 pm
Location: OR

Re: HSA vs 401k Roth Conversions

Post by 1789 » Thu Nov 14, 2019 5:57 pm

If I would be healthier than i am today, i think that would be a better convincing reason not to pass an HSA. You will need this money one way or another when time comes. So why not max out and let it grow tax free and use it when needed. It is hard to know when one needs to go to hospital.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

Post Reply