Why You Might Want to Fund an HSA vs. an IRA

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A health savings account (HSA) is a tax-advantaged account that allows you to set money aside to pay for healthcare costs during the year. It can be a great addition to an individual retirement account (IRA) or a 401(k) plan. If you are low on funds, it might even be better to contribute to an HSA instead of an IRA. Each has similar rules, but they vary on the finer points.

Key Takeaways

  • You get a tax deduction for contributions to a standard IRA or 401(k), but withdrawals are taxable.
  • Deposits made to a health savings account (HSA) are tax-deductible. Withdrawals are also tax-free if used for medical costs or health premiums.
  • Penalties are stiffer for HSA withdrawals than for IRAs if you don't use the money for medical expenses.
  • The amount you can deposit each year in an IRA is much higher than the amount you can deposit in an HSA.

Basic Rules for IRAs

A taxpayer must have earned income to contribute to an IRA. Rental income, dividend or interest income, or income from a deferred compensation plan doesn't count under IRS rules.

Annual contribution limits for 2022 are $6,000 per year, or $7,000 if you're age 50 or older. For 2023, the limits are $6,500 for those under 50 and $7,500 for those aged 50 and older. These limits include contributions made to both Roth and traditional IRAs. However, they don't apply to rollover contributions or qualified reservist repayments. If you make less than the contribution limit, your contributions are limited to the amount of compensation that is taxable.

You used to have to stop contributing to your traditional IRA by age 70 1/2, but now you can keep contributing to it indefinitely as long as you're working.

You get a tax deduction for the amount you contribute to a traditional IRA or a 401(k) if you're eligible, up to the annual contribution limits. Income limits apply for these deductions as well. The money you place in your IRA grows tax-deferred; then, you pay taxes when you withdraw it in retirement.

You must begin to take required minimum distributions (RMDs) by age 72; if you don't, you'll face an excise tax.


The withdrawal rule for RMDs applies to traditional IRAs, not Roth IRAs. Roth IRA withdrawals are not taxed, because contributions to Roth accounts aren't tax-deductible. The money you contribute to a Roth has already been taxed.

Basic Rules for HSAs

You get the same tax deduction with an HSA when you contribute money, but it comes back out tax-free (including interest and earnings) as long as you use the money for medical expenses and qualified health insurance premiums. Contributions made by your employer aren't included in your taxable income, and the money grows tax-deferred.

Contribution limits are $3,650 for the year for individual plans or $7,300 for family coverage in 2022. The limits are $3,850 for individual plans and $7,750 for family coverage in 2023.


You must have a high-deductible health plan that meets certain qualifications in order to use an HSA, or your employer must offer such a plan.

HSA funds can be used to pay for health insurance after age 65. This includes Medicare Part B and long-term care premiums. The funds can't be used for health insurance premiums by those under age 65, though they pay for qualified medical expenses such as co-pays, deductibles, and dental care.

HSAs vs. IRAs

You can use the HSA money just like funds in your IRA or 401(k) after you reach age 65 if you don’t need the funds. You'll pay taxes on withdrawals that aren’t used for medical reasons, however, just as you would if you were to withdraw money from an IRA.

Most withdrawals made from an IRA before age 59 1/2 will result in a 10% penalty tax, but some exceptions apply. These include up to $10,000 withdrawals for first-time homebuyers and medical expenses that exceed 10% of your adjusted gross income (AGI).

Funds are available from an HSA at any time for qualified medical expenses. There is no AGI percentage threshold. The penalty tax increases to 20% if the money is used for anything other than medical costs before you reach age 65.

The contribution limits for HSAs based on income are lower than those for IRAs, and HSAs have no RMDs, while IRAs do.

Rollovers from an HSA to an IRA

HSA funds can't be rolled over into an IRA account. There's also no reason to do so, because you preserve your right to use the funds tax-free for medical costs at any time with an HSA.

Rollovers from an IRA to an HSA

A tax rule allows a one-time tax-free transfer from your IRA to an HSA. This isn't a rollover, because it counts toward your annual HSA contribution limit, but it allows you to move a small amount of money needed for medical expenses from an IRA, where you would have to pay taxes on it, to an HSA, where withdrawals would be tax-free for medical purposes.

Frequently Asked Questions

Should I max out my HSA or my IRA first?

It could make sense to max out your HSA first, since you receive a tax benefit both when you contribute and when you use the funds on medical expenses. And if you hang on to the funds until you reach age 65, you can use them to fund your retirement, paying only income tax and no penalty.

Can I use my HSA as an IRA?

An HSA is not a true retirement account, like an IRA, but you can use the funds in your HSA to help with retirement expenses after age 65. Once you're 65, withdrawals from your HSA are penalty-free, even if you don't use them for medical expenses.

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  1. IRS. "Topic No. 451 Individual Retirement Arrangements (IRAs)."

  2. IRS. "Retirement Topics - IRA Contribution Limits."

  3. House Committee on Ways and Means. "The Setting Every Community Up for Retirement Enhancement Act of 2019 (The SECURE Act)," Page 2.

  4. IRS. "Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans"

  5. IRS. "Rev. Proc. 2022-24," Page 1.

  6. IRS. "Retirement Topics - Exceptions to Tax on Early Distributions."

  7. IRS. "Instructions for Form 8889."

  8. UnitedHealthcare. "2023 Guidelines for Health Savings Account (HSA)."

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