tdogz wrote:johnanglemen wrote:There are two different tax benefits. The initial contribution to the HSA is tax-deductible, and that outweighs the cost of the premiums. Separately, the growth within the HSA is tax-deferred (if used for non-medical expenses) or tax-free (if used for medical expenses).
This rule also applies to your contributions, not only the growth. So if you reach age 65, any money you take out for non-medical expenses won't be subject to the 20% penalty, but is taxed as regular income. If your medical expenses are small in retirement, and you withdrawal from your HSA to cover other costs, you could easily end up paying almost as much (or more) in taxes during retirement than the $300/yr you would be saving now.
The numbers below assume that you are in the 15% bracket in retirement (generous) and that you are withdrawing for non-medical expenses (not generous).
$2000 in taxable investments/for spending in retirement
$700 HDHP premiums
$2300 in tax deferred account
$345 taxes on withdrawal
$1955 for spending in retirement
If your tax rate remains the same in retirement, rather than dropping to 15%, these numbers look far worse. If you use the money for medical expenses you are ahead by small amount. In either case you sacrifice the value of your current health benefits in the process. This might even seem like more of an unknowable question if you were paying for your current PPO plan, but since you're not, any premium you pay for an HDHP plan is essentially an annual fee for contributing to the HSA. How can you overcome such a high fee?