Ask the grumpies: HSA vs. 403(b)?

Leah asks:

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.

To sum:

  1. Fund 403(b) up to the employer match.
  2. Fund HSA.
  3. 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.


15 Responses to “Ask the grumpies: HSA vs. 403(b)?”

  1. Leah Says:

    I am doing exactly what you outline: funding 403(b) past match to our ability plus doing HSA. And fully funding Roth IRA too. I should do the math on when to switch from Roth to 403(b) for taxes.

    I met with a financial advisor from our plan, and she wanted me to do 403(b) only once I hit a threshold in HSA due to investment options or some such. But my thoughts are inclined toward your way too. I’m not sure if her way is better or if she just wanted more money in her plan. We do have most of our nice HSA nest egg invested, and we’ve only reimbursed some stuff, so we have a cushion for later if needed. Side note: she didn’t know you can reimburse health expenses years later, which is another reason I don’t trust her advice much.

  2. solitarydiner016 Says:

    Do you think there’s any chance that the US will ever become socialist enough to have a single payer healthcare system? There are so many scary stories spread about Canada’s “terrible” healthcare system (where I never have to worry about paying for healthcare/losing my insurance/going bankrupt because of illness) that I would be amazed if Americans could ever accept something other than the massively inequitable and inefficient system that you’re currently mired in.

    • nicoleandmaggie Says:

      If the AHCA passes and we don’t end up in a totalitarian regime, it is possible. Once healthcare gets bad enough there will be political will from voters and industry.

  3. Norwegian Forest Cat Says:

    Yay! I had this question too, but sub 401(k) for 403(b). I am so excited to (very soon) have a real grown-up job with benefits!!! I had a lot of reading/catching up to do, since I haven’t had access to anything tax-advantaged…really ever. Thanks, Grumpies!

  4. becca Says:

    One minor consideration- when you leave your employer, you may find they have been covering some hefty fees. In my experience, this is a bigger factor in the HSAs than the 403(b)s. At that point, you may be forced to rolllover the account to another carrier, and I find the HSA options to be *much* more limited than the IRA options. If someone else has found a great low-fee HSA steward that accepts roll-overs, feel free to let us know!

    • Leigh Says:

      I use my credit union for my HSA post-employer. It has a 1% interest rate and no fees. It’s been pretty great. If only I could have gotten out of the $30 closeout fee from the employer’s HSA… I’m guessing there are more of these fees on the HSA because of the lower balances than 401(k)s and 403(b)s.

    • Debbie M Says:

      I use Alliant Credit Union. You have to make a small ($10) donation to a particular charity (Foster Care to Success) to be eligible to join.

      They pay 0.65% interest and allow for rollovers. They used to pay the same as their regular savings account, but they raised the regular interest–twice (now 1.05%)–but not the HSA interest.

      Reviewing for this reply, I see they also allow some investment options once you get $1K saved. Some of them are Vanguard index funds (low fees!)–I don’t know if they charge higher fees than if you invest in Vanguard directly.

      To transfer money in from another institution, you have to first transfer it in to a regular savings account (which takes a couple of days) and then from there to the HSA (instantaneous), so that’s a little annoying. They have a debit card for spending, so I assume that’s easier, though I haven’t tried it.

      After starting an HSA there, I eventually ended up moving my regular online savings from INGDirect/CapitolOne to them because they raised their rates when ING didn’t. And I just got a rewards credit card from them and am in the process of canceling my credit cards from big banks. Not that all of that is relevant to you, but I’m just showing you how I like them.

  5. chacha1 Says:

    My employer pitches in a small match to the 401(k) *and* to the HSA, so I contribute to both every month right up to my limit on the HSA. Can’t imagine there will never come a time when I will have a medical or dental bill to pay that is more than I can handle out of cash flow.

    Incidentally, here’s another thing to pester congressthings about: make HSAs available to all, *not* just to those with high-deductible health plans.

  6. Omdg Says:

    Are these employer sponsored hsa accounts? Or are they independent of work?

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