Residency: HSA vs Roth IRA

[FrugalPhysician]

Hello all,

Future PGY1 here. From the advice in White Coat Investor and this forum, consensus seems to be during residency to take advantage of Roth IRA accounts once you have maxed out other "matching" programs from employers.

My question is, as a resident, why not take advantage of an HSA instead? It has more tax benefits than the Roth, as well as the important benefit of letting you pay off medical bills if they were to arise (Almost as a 2nd emergency fund).

Am I missing an important concept here? Obviously I would like to contribute to both but on a resident's salary and student loan repayment something must give.

-FrugalPhysician

[ENT Doc]

HSAs are superior to Roth's for the purposes of medical expenses.  Triple tax advantaged, as opposed to a Roth, which is tax advantaged only on growth and withdrawal.  However, if you don't use the HSA it converts (please check me on this) to more of a traditional IRA at 65 where it gets taxed on withdrawals for non-medically qualified spending.  In that situation it gets into the Traditional vs Roth debate.  That will depend on your marginal rate now and the expected effective rates on withdrawal.  Hard things to know.  Hard to go wrong with Roth though.

[FrugalPhysician]

Ah I see now. Almost as if, at any given time, HSA > Roth > Traditional. However, in the very likely possibility that at 65 you surplus HSA, it converts to traditional.

Makes lot more to speculate on than I imagined. Current income vs retirement income, current vs future tax rates, possible need for medical expenses.

 

-FrugalPhysician

[FCP]

FrugalPhysician wrote:

Hello all,

Future PGY1 here. From the advice in White Coat Investor and this forum, consensus seems to be during residency to take advantage of Roth IRA accounts once you have maxed out other “matching” programs from employers.

My question is, as a resident, why not take advantage of an HSA instead? It has more tax benefits than the Roth, as well as the important benefit of letting you pay off medical bills if they were to arise (Almost as a 2nd emergency fund).

Am I missing an important concept here? Obviously I would like to contribute to both but on a resident’s salary and student loan repayment something must give.

-FrugalPhysician

Click to expand...

Because as a resident, the likelihood of you having a health plan that is HSA compatible is extremely low.

The only people I know with HSA's are independent contractors with HDHP's.   I wasn't able to get an HSA compatible health plan until finishing training and obtaining my own health insurance as an independent contractor.

[Dreamgiver]

Also, as a resident (assuming your partner does not kick you into a high tax bracket), your current tax bracket is low enough that the long-term flexibility of the Roth is extremely convenient.

[East coast]

FrugalPhysician wrote:

Ah I see now. Almost as if, at any given time, HSA > Roth > Traditional. However, in the very likely possibility that at 65 you surplus HSA, it converts to traditional.

Makes lot more to speculate on than I imagined. Current income vs retirement income, current vs future tax rates, possible need for medical expenses.

 

-FrugalPhysician

Click to expand...

Can't go wrong with either, but I personally value the HSA higher than Roth. To clarify one point - the HSA doesn't convert to a traditional IRA at 65. You can still use it completely tax free for medical expenses as you always could. You do have the option to use that money in the same function as a traditional Ira without a penalty, but it's certainly not a requirement.

[spiritrider]

An HSA does not "convert" to an IRA at 65. Rather at 65 you can take non-qualified distributions without penalty, but still subject to ordinary income taxes like an IRA.

However, that would be extremely short-sighted. Many people grossly under estimate medical expenses in retirement. Any medical insurance premiums after age 65 are HSA qualified medical expenses except for Medicare Supplement policies. This includes Long Term Care policies.

Qualified medical expenses also include any out-of-pocket expenses (deductibles, co-insurance, co-pays, etc...) for Medical, Dental, Vision, Hearing, It is estimated that a current retiree age 65 will incur $250K medical expenses in retirement. For the vast majority of people, they will run out of HSA assets long before they run out of medical expenses.

I believe that after making the minimum qualified plan deferrals to receive the maximum employer match, HSA accounts should be the next priority. You are getting reduced income taxes and FICA taxes and almost certainly tax-free distributions. You should also save your receipts and not take qualified distributions unless you are other wise unable to maximize your Roth IRA space. You have an indefinite time before taking qualified withdrawals for qualified expenses.

[FrugalPhysician]

Not completely sure if we are offered an HSA or  not, orientation in a few weeks. But I asked for a sample of all policies and the paperwork shows a very well priced HSA premium. Wouldn't employers want to offer an HSA, as it reduces their monthly premium as well?

 

Also thanks for everyone for clarification. I understand that it doesn't "convert", but if you find yourself with the extra money, the tax structure treats it like a traditional. I also agree that people (even physicians) likely GREATLY underestimate healthcare cost. That's why I was thinking of pumping some non-taxed money into it for expenses over the next decade. (childbirth, etc).

I think I will prioritize the Roth, but an HSA certainly sounds like a viable option as well.

-FrugalPhysician

 

 

 

[saul]

I have had a HDHP (and HSA) in medical school, transitional year, and now residency. I think it is uncommon to not have it as an option.

[RogueDadMD]

saul wrote:

have had a HDHP (and HSA) in medical school, transitional year, and now residency. I think it is uncommon to not have it as an option.

Click to expand...

I didn't have it as an option for my residency or fellowship.  I have it as a faculty member at my university and love it.

http://www.roguedadmd.com/2017/06/high-on-high-deductibles/

Just posted that this morning.  The math doesn't really make sense for me to do anything else.

 

[RogueDadMD]

Rogue Dad, M.D. wrote:

http://www.roguedadmd.com/2017/06/high-on-high-deductibles/ Just posted that this morning.  The math doesn’t really make sense for me to do anything else.

Click to expand...

That link looks off when I saw the post.  So if interested in reading, try clicking here

 

[jfoxcpacfp]

saul wrote:

I have had a HDHP (and HSA) in medical school, transitional year, and now residency. I think it is uncommon to not have it as an option.

Click to expand...

It used to be extremely uncommon (8-10 years ago) to find employers who offered HDHP's couple with HSA accounts to employees. I did a lot of education then as nobody understood what they were or how they worked - it was like banging my head against the wall a lot of times. The tide has changed. I estimate about half of our physician clients now have access to an HSA at at least one of the couple's employers.

If you are not sure you'll be working for an employer for at least a year, you should educate yourself re: the penalties for overcontributing to your HSA under the last-month rule.

[ENT Doc]

spiritrider wrote:

An HSA does not “convert” to an IRA at 65. Rather at 65 you can take non-qualified distributions without penalty, but still subject to ordinary income taxes like an IRA.

However, that would be extremely short-sighted. Many people grossly under estimate medical expenses in retirement. Any medical insurance premiums after age 65 are HSA qualified medical expenses except for Medicare Supplement policies. This includes Long Term Care policies.

Qualified medical expenses also include any out-of-pocket expenses (deductibles, co-insurance, co-pays, etc…) for Medical, Dental, Vision, Hearing, It is estimated that a current retiree age 65 will incur $250K medical expenses in retirement. For the vast majority of people, they will run out of HSA assets long before they run out of medical expenses.

I believe that after making the minimum qualified plan deferrals to receive the maximum employer match, HSA accounts should be the next priority. You are getting reduced income taxes and FICA taxes and almost certainly tax-free distributions. You should also save your receipts and not take qualified distributions unless you are other wise unable to maximize your Roth IRA space. You have an indefinite time before taking qualified withdrawals for qualified expenses.

Click to expand...

Great points.  And indeed, I didn't mean to say that it converts.  I meant to say that you have the option to use it as a traditional IRA at that time.  The medical expense costs are no joke - especially since I expect social security and Medicare to be further means tested in the future.  Presumably since you're doing such a diligent job so early you'll be in a favorable position in that regard.  Not so favorable when it comes to benefits.  So may be wise to save up.  Lots of people with hearing needs, but Medicare doesn't cover hearing aids.  And they cost $$$.

[RogueDadMD]

ENT Doc -- I heard some story on NPR not that long ago about a company trying to do for hearing aids what's been done with glasses. They came up with a way to easily customize them and sell cheaply without need for an audiologist (or whoever is the gatekeeper). Sounds like they were facing lots of hurdles so don't know what happened...

[jfoxcpacfp]

FrugalPhysician wrote:

Wouldn’t employers want to offer an HSA, as it reduces their monthly premium as well?

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This was the original idea behind the HSA - lower premiums for the employer while motivating the employee to take more personal responsibility for their healthcare spending.