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investing in nondividend growth securi- automatically shifts medical insurance
Contributions ties that defer gain realizations, among to Medicare upon reaching their 65th
many other possibilities. But for many
birthday. However, a taxpayer can reject
to an HSA are taxpayers, IRAs are comparable with these automatic enrollments, allowing
deductible if the HSA. If a taxpayer is familiar with the taxpayer to continue making tax-
an HSA, she also likely is somewhat
deductible contributions to an HSA as
contributed by familiar with a traditional IRA or a long as he or she maintains coverage
the taxpayer or Roth IRA. So, next we compare the under a qualified HDHP. 5
Some employers allow employees
excludable from features of these tax-favored vehicles, to receive some (or all) of their health
although it is important to note that it is
gross income if quite possible, and likely advisable, for a insurance benefit in the form of contri-
contributed by taxpayer to utilize both an HSA and an butions to an HSA, which are deductible
to the employer and excludable to the
IRA simultaneously.
the taxpayer’s Some pertinent HSA details: employee. Taxpayers without this form
employer. An HSA is available to any taxpayer of compensation can make their own
who maintains an HDHP, who has contributions. Regardless of source, the
no other health insurance (including annual contributions to an HSA are lim-
B, we see that increasing the 15% long- Medicare), and who cannot be claimed ited in 2022 to $3,650 for an individual
term capital gains tax to 30% doubles as a dependent on someone else’s tax self-only plan or $7,300 for a family
the additional 10-year after-tax return return. For this purpose, an HDHP plan ($3,600 and $7,200, respectively,
from delaying HSA reimbursement to must meet the requirements of Sec. in 2021), and an additional $1,000 for
6.6, 23.7, and 63.2 percentage points 223(c)(2), including 2022 maximum taxpayers who are age 55 by the end of
across the 2%, 6%, and 12% respective annual out-of-pocket expenditures of the tax year.
annual pretax rates of return. $7,050 for a self-only plan or $14,100 Withdrawals from an HSA are tax-
Tables 1 and 2 show that funds al- for a family plan ($7,000 and $14,000, free if they are used for qualified medical
lowed to remain in an HSA produce respectively, in 2021). In accord with its expenses, as defined in Sec. 223(d)(2),
greater after-tax returns than funds high-deductible name, an HDHP must that, for expenditures incurred after Dec.
withdrawn from an HSA and then also have 2022 (and 2021) minimum 31, 2019, include menstrual care prod-
invested. The differential is widest when deductible amounts of $1,400 for a self- ucts and over-the-counter medicine.6
the underlying investment produces only plan and $2,800 for a family plan. A taxpayer must be able to substanti-
higher pretax rates of returns and when Contributions to an HSA are de- ate that the withdrawals were used for
the taxpayer’s marginal tax rate is greater. ductible if contributed by a taxpayer qualified medical expenses. Withdrawals
Also note that keeping the funds inside or excludable from gross income if from an HSA greater than amounts
the HSA has greater relative tax ben- contributed by a taxpayer’s employer. used for qualified medical expense are
efits when the underlying investment However, once a taxpayer begins Medi- taxable, and an additional 20% penalty
produces annual earnings realizations care coverage, no contributions to an is applied to withdrawals before the
(Table 1) than when it produces end- HSA are allowed. For taxpayers who taxpayer reaches age 65 that are not used
of-the-investment-period capital gains will begin Medicare in the month they for qualified medical expenses. The 20%
(Table 2). turn 65, contributions to the HSA must penalty is waived upon the death or dis-
cease and the taxpayer can only deduct ability of the beneficiary. The HSA has
Comparing the HSA with a a month-based pro rata portion of the no minimum required distributions.
traditional IRA and a Roth IRA annual HSA contribution limit for that Comparable aspects of
A variety of investments provide tax year. Taxpayers should be aware that traditional IRAs and Roth IRAs:
benefits, including (1) purchasing a they can become accidentally enrolled Neither the traditional nor Roth IRA
security that produces tax-exempt in Medicare when they turn 65 because requires health insurance coverage of
municipal bond interest; (2) acquiring the Social Security Administration any kind, and certainly not HDHP
real estate and property that produces automatically enrolls them or because coverage. On the other hand, both IRA
tax-sheltering depreciation; and (3) they work for a smaller employer who types require service-related income

5. Practitioners should discuss with the clients the possible downsides of not enrolling in Medicare Part A, which are beyond the scope of this article.
6. Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, Sec. 3702, Sec. 223(d)(2).

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