A 45 year old single female in relatively good health has an HSA and an IRA. She can afford to contribute about $2000 a year to both (not each) the HSA and the IRA.
Should she split the 2000 between the HSA and IRA or should she contribute all of the 2000 to the HSA?
If she had 4000 to contribute, I would think she would contribute 2850 to the HSA (the maximum allowed) and the balance to the IRA.
My personal opinion is 100% to HSA if the age 65.5 withdrawal requirement for any purposes is not a big deal (compared to an IRA's
59.5).
What are rates of return expected on each? What are account minimums for each? How much health expenses does person have? IS HSA money supposed to be for health expenses now, or health expenses in retirement?
No single correct solution (setting 4k aside is a good move).
Some other info would help. If she puts $2k in the IRA, is it fully deductible? That's a big advantage of an HSA, the contribution is deductible regardless of your income or participation in a retirement plan. If her tax bracket is low/zero this is less important.
Does she have any retirement assets or retirement savings plans she's actively contributing to (eg 401k at work)? When does she plan to draw from her retirement savings? That might favor IRA over HSA.
Generally it would seem strange to put all of the money into the HSA, given its restrictions on use.
The other issue here is the $2k savings rate. With HSA-compatible health insurance, and its high annual deductible, she will have out of pocket costs to cover - it's just a question of when and how much. Using an HSA plan reduces the cost of the insurance, but you really should think in terms of setting aside some of that savings into the HSA.
Last point - obscure - the end-of-2006 health/tax bill (acronym "HOPE") allows for a once-per-lifetime, IRA-to-HSA transfer starting this year. It's of limited use because you're still subject to the $2850 (currently) annual limit on HSA contributions. But it is a mechanism for moving some money from one to the other, if only once; it might be an argument for a higher IRA contribution, given limited funds.
-Tad
Other than the higher age requirement for penalty-free general purpose withdrawals, there are no extra restrictions on an HSA over an IRA. You withdraw money from either before the retirement age (65.5 for HSA, 59.5 for IRA), it's 10% penalty + income tax. After retirement age, both most pay income tax. The difference is that with an HSA, withdrawals for medical can be done anytime with no penalty, no tax. So in terms of the tax benefits, an HSA is equal or better than an IRA in every category except for the age requirement.
Where there may be an issue is in the implementation. You won't be able to go to Zecco or Wells Fargo and get $0 commission trading for your HSA. Nor can you call up Vanguard and open up HSA accounts with them. So you end up going through 3rd parties who then charge fees above what an IRA would charge. (They have to because they must review submitted medical bills to determine tax status on withdrawals.) Whether the tax benefits overcome the fees will depend on a case-by- case scenario for each HSA administrator being considered.
Money into IRA is fully deductible. Her tax bracket is at the lowest level
No 401k. She is self employed and that's her only source of income. She would not withdraw money from her IRA until she shuts her business down which could be well into her sixties or seventies.
Perhaps a 50/50 split
Good point.
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