Why I Choose to Fund My HSA First

Before I go into why I choose to fund my Health Savings Account (HSA) before my Individual Retirement Account (IRA) I will say that it depends on your individual financial goals, circumstances, and priorities.

Here's why it works for me to fund my HSA first:

1. Tax Advantages: Both HSAs and IRAs offer tax advantages. HSA contributions are tax-deductible, grow tax-free, and withdrawals for qualified medical expenses are tax-free as well. You read that right, if you use the funds for qualified medical expenses, you're getting the power of both a traditional IRA and a Roth IRA.

2. Health Expenses: I am fortunate enough to be in good health and thus have opted for a high-deductible health plan. I chose this because other than my annual, I typically spend much time in the doctors office. Unless I'm around poison ivy, but that's a tale for another time. That being said, I know Father Time is undefeated. There will be a point in my life where I incur larger medical expense on a more frequent basis. Knowing I can spend tax free dollars on my qualified medical expenses can take the edge off paying medical bills. HSA funds can be used for a wide range of qualified medical expenses, including deductibles, co-pays, prescriptions, and even certain over-the-counter items. Check out the broad list of items that qualify.

3. Employer Contributions: For my W2 audience, specifically when someone else is cutting the check, your employer might offer a matching contribution to your HSA, it's generally a good idea to take advantage of that free money by funding your HSA first. Employer contributions can provide an immediate boost to your HSA balance, helping you save for future medical expenses.

What if I somehow I don't need such a large savings account for medical expenses?

Per the National Library of Medicine, the average lifetime spend on medical expenses is over $250K. Even if you're health is above average, that is a significant part of your retirement nest egg.

If Optimism Bias is still holding you back, know that after you hit your retirement age, you can withdrawal funds for non-medical expenses, they will just be taxed as ordinary income (Like a Traditional IRA) which depending on your tax bracket upon retirement could also be advantageous.

TLDR:

Save for retirement and know that you have choices on how to save!