Residency: HSA vs Roth IRA

[tex]

FrugalPhysician wrote:

Thoughts? Anything I’m overseeing.

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Having worked through the math for my own situation and always follow threads here and BH regarding others' situation, the math frequently seems to favor (or at least equivocate) HDHP for anyone with the emergency fund / cash flow for the deductible. Seems like that is the case for you even before you account for short- and long-term benefits of using the HSA.

You've asked two questions:

1) HDHP or LDHP. You can make this decision independent of #2. Account for max OOP cost when figuring out how much you need in emergency fund. I'm wary of "HSA is part of my emergency fund" if you plan on investing inside your HSA like is typically done here. If you truly will need your HSA funds in a medical emergency, leave it as cash until you can self-insure elsewhere. If this applies, you could contrib to HSA now for the tax-advantaged space, and invest it later.

2) Which to fund first, HSA or Roth. Any decision requires predicting healthcare costs, healthcare and tax policy decades in advance. Best not to overthink as both are good options. Focusing on living within your means and building an emergency fund are the better long term investments in your low-income years - investing on top of that is great, and HSA v Roth isn't as big of a decision. As a resident in a presumably low tax bracket I would try to fill both before contrib to tax-deferred beyond the match, beyond that the law of diminishing returns comes into effect

 

 

[FrugalPhysician]

Reviving a relatively old post here but we got our information Tuesday.

It seems there is a LDHP and a HDHP (HSA) that are most competitive.

LDHP is $5800 annual premium with a $750 deductible.

HDHP is $2350 annual premium with $4000 deductible.

Obviously all kind of scenarios can play out but it seems that worst case scenario, if I max out my deductibles, both options come out roughly the same. ($6500 for LDHP and $6300 for HDHP/HSA). Anything short of reaching my deductible significantly favors the HSA.

The absolute maximum out of pocket's expenses favor the LDHP by about $1100. (11.1k vs 12.2k). Again, worst case scenarios.

As a relatively young couple with no significant health problems and no plans for children this year, it seems logical to do the HDHP. This is not even factoring in the $500 employee match or the tax contributions savings.

 

Thoughts? Anything I'm overseeing.

 

-FrugalPhysician

[spiritrider]

I agree that blanket statements are not useful. Each person's specific circumstances must be weighed.

These include difference in premiums, employer contributions, gamed out difference in out-of-pocket costs in different scenarios, savings from income tax and FICA tax exclusion from income, etc...

For example, assuming you are in a 25% federal and 5% state tax brackets, adding in FICA, the total tax savings on the contribution can be 37.65%. On a family plan maximum contribution of $6,750 that is ~= $2,540. You add in the premium savings and employer contribution and you can pay most if not all of any out-of-pocket costs.

To correct a previous point, you are still getting the income tax and FICA tax benefits even if you are forced to use the full HSA contribution for expenses (extremely rare). Also, the FICA benefit decreases substantially when your W-2 Box 5 exceeds the Social Security maximum wage base (2017 = $12,700).

Of course two very high tax states CA and NJ through monkey wrenches in the math by not going along on HSAs.

[RogueDadMD]

I don't see the point in blanket statements. It's a math question as much as anything. If the premiums are substantially lower it can be a better financial move to do the HDHP and fund part or all of an HSA, regardless of how big of a tax deduction you get. If you can afford a Roth and an HSA, even better.

[jfoxcpacfp]

pulmdoc wrote:

I think it is a potentially big mistake to have a HSA in residency. Why? Because in order to qualify for an HSA, you have to use an eligible HDHP as your health insurance. HDHP’s make great sense for high income professionals in good health because of the tax benefits and the ability to cashflow routine medical expenses without tapping into the HSA, allowing for tax free growth. However, a resident is not going to have that luxury. If they have medical expenses, they will need to tap out the HSA to pay for them. So they only get the investment/tax benefit of the HSA if they remain in perfect health. This can happen of course, but it is a risk a resident is ill-equipped to take.

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You and Muaddib have some valid points. The deduction is not as beneficial in residency as it will be later on and, given the choice with limited dollars, the Roth may very well be the better option. I still don't think it should be bypassed if a resident has the ability to fund both, particularly if one spouse is already through with education/training and in their career. Residents should be in their peak years of health and (barring pregnancy) may be able to easily skate by with minimal healthcare costs. Plus, the HSA may be the only choice offered to employees, so there may be no alternative - better to go with the HSA than to self-insure. Fortunately, most employers at least partially fund the account.

[Muaddib]

plus if you have you or your spouse birth kids in residency that's your deductible right there in non high deductible plans

[pulmdoc]

I think it is a potentially big mistake to have a HSA in residency. Why? Because in order to qualify for an HSA, you have to use an eligible HDHP as your health insurance. HDHP's make great sense for high income professionals in good health because of the tax benefits and the ability to cashflow routine medical expenses without tapping into the HSA, allowing for tax free growth. However, a resident is not going to have that luxury. If they have medical expenses, they will need to tap out the HSA to pay for them. So they only get the investment/tax benefit of the HSA if they remain in perfect health. This can happen of course, but it is a risk a resident is ill-equipped to take.

[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.

[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...

[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.

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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 $$$.

[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.

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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.

[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.

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

 

[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.

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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.

 

[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.

[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