When deciding between investing your money in a Health Savings Account (HSA) or an Individual Retirement Account (IRA), some significant benefits and downsides need to be recognized.
Both accounts allow you to save money for your retirement in a tax-advantaged way. Contributing to either account will lower your overall taxable income by how much you deposit. Also, each account allows your contributions to be invested into stocks, bonds, CDs, etc. The investment growth will not be taxed until you withdraw from them in retirement. However, these are not the only benefits of both accounts.
Health Savings Accounts are excellent options in large part because of rising health care costs and insurance premiums. HSAs have three inherent tax advantages:
- Contributions are tax-deductible.
- Investment growth and interest are tax-exempt
- Withdrawals for qualified health expenses are tax-free
Savings accrued in HSAs can be rolled over from year to year, meaning there’s no “use it or lose it” provision as is the case with flexible spending accounts (FSAs). Eligible HSA owners may make the maximum contribution allowed each year regardless of how much they save in other retirement plans, such as IRAs and 401(k) plans. HSA owners 55 and older are allowed to contribute extra. Longer lifetimes and uncertainty around the future of Medicare make it even more important for savers to account for health care costs in their financial planning.
Individual Retirement Accounts are excellent for saving towards retirement. Unlike the HSA, they do not relate to medical expenses or insurance plans. IRA’s only focus on growing your money tax-deferred for retirement. You can contribute up to $6,000 each year ($7,000 if you are age 50 or older). When you reach age 70.5 you are required to begin making withdrawals.
The Health Savings Account and the Individual Retirement Account are both excellent tools to position your finances for health care costs and retirement.
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