In today’s video, Tim Uihlein, Partner and Senior Wealth Manager discusses whether you should fund a Roth IRA or an HSA (Health Savings Account) first. The answer depends on your age, income, and health status.

If you have the ability to contribute to both, it is generally recommended to start with a Roth IRA if you are young. This is because a Roth IRA offers tax-free growth and tax-free distributions, making it an efficient long-term investment vehicle. However, keep in mind that there are income limits for contributing to a Roth IRA, and as you earn more, you may phase out of eligibility.

On the other hand, if you are older or have higher income, an HSA could be a good choice. To contribute to an HSA, you must have a high deductible health plan. The HSA provides triple tax advantages: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. It can serve as a valuable tool for saving for healthcare costs in retirement.

Ultimately, it’s important to consider your specific circumstances and consult with a financial professional to determine the best approach for you. They can provide personalized advice based on your age, income, and health condition. If you would like more detailed information tailored to your situation, feel free to reach out to chat with Tim at the link 👇 below.

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*For Educational Purposes Only. No portion of this content should be construed as investment advice. No portion of this content should be construed as an offer or solicitation for the purchase or sale of any security. References to specific securities, investment programs, or funds are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities. Past performance is not a predictor of future results.

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Which To Fund First: Roth IRA Or HSA?

When it comes to saving for your future, there are various investment vehicles to choose from. Two popular options that provide tax advantages are Roth IRAs (Individual Retirement Accounts) and HSAs (Health Savings Accounts). Both offer unique benefits, but deciding which to fund first can be a difficult decision. So, let’s take a closer look at both and weigh the pros and cons to help you make an informed choice.

First and foremost, it is important to understand the primary purpose of each account. A Roth IRA is designed specifically for retirement savings, allowing you to make contributions with after-tax dollars and then enjoy tax-free growth and tax-free withdrawals in retirement. On the other hand, an HSA is geared towards covering qualified medical expenses, offering a triple tax advantage. Contributions are made with pre-tax dollars, grow tax-free, and can be withdrawn tax-free when used for eligible healthcare expenses.

Now let’s delve deeper into the benefits of each account. A Roth IRA’s tax-free growth potential over several decades of investing can significantly boost your retirement savings. It provides flexibility in terms of investment options, allowing you to choose from a wide range of stocks, bonds, mutual funds, and other assets. Additionally, it can be helpful during retirement if you expect to be in a higher tax bracket, as withdrawals are not subject to income tax.

On the other hand, an HSA provides tax benefits that can save you money on current healthcare expenses. Contributions made through payroll deductions are exempt from federal income tax, Social Security tax, and most state income taxes. This reduces your taxable income and the overall amount of taxes you owe. Moreover, if you don’t use your HSA funds for medical expenses in any given year, they roll over to the following year, allowing for potential future growth.

One important factor to consider is that HSAs have contribution limits, while Roth IRAs have both contribution and income limits. For 2021, individuals can contribute up to $3,600 to an HSA, and families can contribute up to $7,200. On the other hand, Roth IRA contributions are limited to $6,000 per year ($7,000 if you are over 50) for individuals with a modified adjusted gross income (MAGI) below $125,000 (or $198,000 for couples filing jointly). If your income exceeds these limits, you may not qualify to contribute to a Roth IRA directly.

So, which account should you fund first? It depends on your personal circumstances and financial goals. If you have immediate medical expenses or anticipate significant healthcare costs in the near future, maximizing your HSA contributions may be the prudent choice. The tax deductions can help reduce your current healthcare costs effectively. Conversely, if you prioritize long-term retirement savings, a Roth IRA can provide greater flexibility and potential growth over time.

Ultimately, it is often recommended to strike a balance between the two if you have the means to do so. Remember that you can withdraw funds from your HSA penalty-free after the age of 65, although you’ll still owe income taxes on non-qualified withdrawals. Considering both accounts can offer valuable tax advantages and long-term savings potential, it’s essential to consult with a financial advisor or tax professional to devise a strategy that best suits your specific situation.

In conclusion, making the choice between funding a Roth IRA or HSA first is dependent on your individual circumstances, financial goals, and current healthcare needs. Each account offers unique tax advantages, so carefully evaluate the advantages and constraints of both to make an informed decision that aligns with your objectives. Remember, it’s never too early to plan for your future and prioritize your financial well-being.