IRAs

HSA vs. IRA: Which One to Fund First?

You'll maximize the tax benefits by letting the health savings account grow and using other money for current medical expenses.

I just received a $5,000 tax refund. Does it make more sense to contribute to my health savings account or to my Roth IRA? --H.N., St. Louis

Start with the HSA, which provides a triple tax break: Your contributions are tax-deductible (or pretax if you make them through an employer), the money grows tax-deferred in the account, and it can be used tax-free for medical expenses in any year. If you have an HSA–eligible health insurance policy—with a deductible of at least $1,300 (or $2,600 for family coverage)—you can contribute up to $3,350 to an HSA for 2016 (or $6,750 for family coverage), plus $1,000 if you’re 55 or older. If you still have money left over, contribute it to the Roth.

Among the expenses that qualify for an HSA: your deductible, co-payments, prescription drugs, dental and vision care, and other out-of-pocket medical expenses. You can even tap the HSA tax-free to pay long-term-care insurance premiums, up to certain limits that depend on your age. You can’t make new HSA contributions after you enroll in Medicare, but you can use the money tax-free for Medicare Part B, Part D and Medicare Advantage premiums (medigap does not qualify). You’ll maximize the tax benefits by letting the health savings account grow and using other money for current medical expenses. If you keep the receipts, you can reimburse yourself from the account for any eligible expenses since you opened the HSA (even years later), providing a tax-free stash of money for retirement.

Look for an HSA administrator that lets you invest in mutual funds rather than a low-interest savings account. To find one and compare fees, go to www.hsasearch.com.

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