Is it better to fund an HSA fully and put a bit less in 403(b) or maximize 403(b)? I can’t afford to fully fund both (nor fully fund the 403(b) period).
Standard disclaimers about seeing a real financial professional (not us) before making major financial decisions.
It is my understanding that in general the HSA is a better deal (assuming you’re not missing a 403b match!) because it is tax advantaged going in and taking it out and you can use it at any time (so long as it is for a health related purpose before age 65, and will only owe income taxes if you use it for non-health expenses after). The 403(b) is only tax advantaged one way (going in if it’s traditional, and going out if it’s a Roth) and you have to wait to use it until you’re 59.5 if still employed or 55 if you leave the job then, or earlier if you’re willing to take “substantially equal payments”.
This is making the assumption that you will have health related expenses that you will use the HSA for, which is a pretty good assumption. (I’m willing to bet that if we ever became so socialist as to move to government paid single-payer that the HSAs would automatically convert to IRAs.)
You probably wouldn’t want to put no money away for retirement, because in theory you would want to live off some of the 403(b) money too. But the limits for the HSA are only $3,350 for individuals or $6,650 for families and the 403(b) allows $18K. If you can only afford to put away $3,350, it might still be worth it to fund the HSA and not the 403(b) because healthcare problems don’t suddenly become free just because you’re lower income, especially with political threats to Medicaid going forward. So that special case is difficult to decide. If the HSA limit was higher, then there is a point in which you would want to fund the retirement account before the health savings account, but I’m not sure when that point would be.
Exception: If you have employer matches, then put the money wherever it needs to go to max out the employer match first.
- Fund 403(b) up to the employer match.
- Fund HSA.
- Fund remainder of the 403(b).
There may be an exception if either your HSA or your 403(b) has worse (read: higher fee) funds than the other. In that case you might want to stick with the better provider and ignore other considerations, other than the employer match which will still generally swamp any other concerns.