Roth IRA vs. HSA: Which Account Should You Spend First After Age 65?
If you've been a diligent saver, you might find yourself approaching retirement with two of the most powerful tax-advantaged accounts available: a Roth IRA and a Health Savings Account (HSA). Both offer incredible benefits, but they work differently once you reach Medicare age.
The key question becomes: when you have both accounts available, which should you spend from first? The answer can save you thousands in taxes and Medicare premiums while helping preserve your wealth for the future.
Two Powerful Tax-Free Buckets
Before diving into strategy, let's understand what makes each account special:
Roth IRA:
- Tax-free growth and withdrawals (after age 59½ and five years of account ownership)
- No required minimum distributions during your lifetime
- Excellent inheritance vehicle for your heirs
Health Savings Account (HSA):
- Triple tax advantage: deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses
- Becomes a flexible retirement account after age 65
- Can pay Medicare premiums and most healthcare costs tax-free
How the Rules Change at Age 65
Once you reach Medicare eligibility, the tax landscape shifts:
Roth IRA withdrawals remain completely tax-free and don't count as income. This means they won't push you into higher tax brackets or trigger Medicare premium surcharges.
HSA withdrawals for medical expenses stay tax-free. However, if you use HSA money for non-medical purposes, you'll pay income tax (though the 20% penalty disappears at 65). More importantly, these non-medical withdrawals count as taxable income for Medicare premium calculations.
The Smart Spending Strategy
Here's the optimal three-step approach:
1. Use HSA for All Medical Expenses First
Pay every qualifying medical cost directly from your HSA. This includes:
- Medicare premiums (Parts A, B, C, and D)
- Prescription drugs
- Doctor visits and specialist care
- Dental and vision care
- Medical equipment and supplies
These withdrawals are completely tax-free and don't increase your taxable income.
2. Keep HSA Funds for Future Healthcare Needs
Healthcare costs typically increase with age. Maintaining a healthy HSA balance gives you a dedicated, tax-free fund for future medical needs, including:
- Long-term care expenses
- Hearing aids and mobility equipment
- Unexpected health emergencies
3. Use Roth IRA for Lifestyle Spending
Tap your Roth IRA for discretionary expenses like:
- Travel and vacations
- Home improvements
- Gifts to family members
- General living expenses
These withdrawals won't increase your taxable income or trigger higher Medicare premiums.
The Medicare Premium Trap
One of the biggest mistakes retirees make is ignoring how their withdrawals affect Medicare premiums. High-income beneficiaries pay Income-Related Monthly Adjustment Amounts (IRMAA) that can add hundreds of dollars to monthly Medicare costs.
For 2025, IRMAA surcharges kick in at:
- Single filers: $106,000 in income
- Married filing jointly: $212,000 in income
Using HSA funds for medical expenses instead of making taxable withdrawals helps keep your income below these thresholds.
Real-World Examples
High Medical Costs: If you're paying $3,000+ annually in Medicare premiums plus regular healthcare expenses, prioritize HSA withdrawals for these costs. The tax-free treatment is a guaranteed win.
Minimal Medical Costs: If you have few medical expenses and no heirs, you might use Roth funds more liberally while preserving the HSA for future needs or eventual taxable withdrawals.
Legacy Planning: If leaving money to heirs is important, spend HSA funds on healthcare first and preserve the Roth IRA. Inherited Roth IRAs provide tax-free growth for beneficiaries, making them extremely valuable legacy assets.
Your Action Plan
As you approach age 65:
- Stop HSA contributions six months before Medicare enrollment to avoid complications
- Keep adequate cash in your HSA for unexpected medical expenses
- Monitor income thresholds to avoid Medicare premium surcharges
- Coordinate with other income sources like Social Security and pensions
- Review annually as your situation and tax laws change
The Bottom Line
The winning strategy is simple: use your HSA for healthcare expenses and your Roth IRA for everything else.
This approach typically delivers:
- Lower taxes
- Reduced Medicare premiums
- Better wealth preservation
- More flexibility in retirement
Remember, everyone's situation is unique. Your health status, family history, legacy goals, and other income sources all influence the optimal strategy. Consider working with a qualified financial advisor who can model different scenarios and help you develop a personalized withdrawal plan.
The key is planning ahead and being strategic about which account you tap for different types of expenses. By understanding how these accounts work together, you can make informed decisions that maximize your retirement income while minimizing your tax burden.
Ready to create a personalized retirement withdrawal strategy? Schedule a free consultation today, and let's build a plan that fits your unique goals and circumstances.
We believe the information provided is accurate, but it's not intended as tax or legal advice and shouldn't be used to avoid federal tax penalties. For guidance on your specific situation, please consult your own tax or legal advisor. If you're doing estate planning, it's important to work with professionals, including your attorney or tax expert. This content does not include specific investment advice or recommendations to buy or sell any securities. Also, while strategies like asset allocation and diversification can help manage risk, they do not guarantee profits or protect against losses in a declining market.
