Are HSAs Going Roth?
Many provisions in the Tax Cuts and Jobs Act expire at the end of 2025. Lawmakers continue to debate whether to extend those tax cuts. Congress must identify revenue sources to offset the cost of any extension. One proposal suggests changing how Health Savings Accounts operate. Some lawmakers have discussed requiring HSA contributions to follow Roth tax treatment.
Are HSAs going Roth? No law mandates that change today. However, policy discussions continue. Savers need to understand how HSAs work and how Roth treatment could affect their tax strategy.
How HSAs Work Under Current Law
A Health Savings Account is a tax-advantaged account designed to cover qualified medical expenses. The individual owns and controls the account. An employer does not own the funds, even if it contributes.
To qualify for HSA contributions, an individual must meet three requirements:
- The person must enroll in a High Deductible Health Plan (HDHP)
- The person must not enroll in Medicare.
- The person must not qualify as a dependent on another taxpayer’s return.
Unlike many retirement accounts, HSAs have no income phase-outs for eligibility. Anyone who meets the HDHP requirement can contribute up to the annual IRS limit.
HSA contributions receive an above-the-line deduction. Taxpayers can claim that deduction even if they take the standard deduction. This structure lowers adjusted gross income and may reduce other tax exposures tied to income thresholds.
The account grows tax-deferred. Withdrawals remain tax-free when used for qualified medical expenses. Those expenses include most medical and dental services and prescription drugs. The IRS provides detailed guidance in IRS Publication 502.
If someone withdraws HSA funds for non-qualified expenses, the IRS taxes the distribution as ordinary income. The IRS also applies a 20% penalty. Once the account owner reaches age 65, becomes disabled, or dies, the penalty no longer applies. Ordinary income tax still applies to non-qualified withdrawals.
This combination of upfront deductions, tax-deferred growth, and tax-free qualified withdrawals gives HSAs a unique position in tax planning.
Why Congress May Consider Roth HSAs
The debate around whether HSAs are going Roth connects directly to federal budget planning. When Congress evaluates tax cut extensions, lawmakers must address lost revenue. Roth-style contributions generate immediate tax revenue because taxpayers fund them with after-tax dollars.
If lawmakers require Roth HSA contributions, taxpayers would no longer deduct those contributions. The government would collect income tax upfront. Over time, the government would give up revenue on tax-free withdrawals. Budget scoring rules often make upfront revenue attractive in the short term.
From a federal budget perspective, Roth treatment shifts tax revenue from the future to the present. From a taxpayer perspective, that shift changes planning dynamics.
What Would Roth HSA Treatment Mean?
Under current law, HSA contributions reduce taxable income. Under Roth treatment, contributions would no longer create a deduction. Account holders would fund contributions with after-tax dollars.
The benefit of tax-free withdrawals for qualified medical expenses would likely remain intact. However, savers would lose the upfront tax break.
To understand the impact, consider how HSAs compare with other account types:
- Traditional IRA: Contributions may reduce taxable income. Withdrawals receive taxation as ordinary income.
- Roth IRA: Contributions do not reduce taxable income. Qualified withdrawals remain tax-free.
- Current HSA: Contributions reduce taxable income. Qualified withdrawals remain tax-free.
Today’s HSA structure combines features of both traditional and Roth accounts. It allows a deduction at contribution and tax-free qualified withdrawals. If HSAs shift to Roth treatment, they would resemble Roth IRAs in funding structure, while still limiting tax-free withdrawals to medical expenses.
For savers in high tax brackets, the loss of the deduction could reduce the appeal of HSA contributions.
Are HSAs Going Roth in 2025?
No enacted law requires Roth HSA contributions as of January 2025. The idea remains a proposal within broader tax reform discussions. Congress must weigh political priorities, fiscal constraints, and voter response before adopting any change.
Tax legislation often changes during negotiation. Lawmakers may modify, delay, or discard proposals. Taxpayers should monitor legislative updates before adjusting long-term strategies.
Financial advisors should review client HSA strategies in light of possible tax reform. Clients who value current deductions may want to maximize contributions under existing rules while they remain available.
Why Roth HSAs Could Hurt Savers
For many taxpayers, the HSA deduction provides immediate value. It lowers taxable income and can reduce marginal tax liability. It can also reduce exposure to phase-outs, Medicare premium surcharges, and other income-based thresholds.
If Roth treatment replaces the current structure, taxpayers would lose:
- The above-the-line deduction that lowers adjusted gross incomeThe ability to reduce current-year federal income taxes
- High-income savers would likely feel the change most. Those in lower tax brackets may see a smaller impact, depending on future tax rates.
Some analysts argue that younger savers might benefit if they expect higher tax rates later. However, medical expenses often increase in retirement. The current HSA model already allows tax-free withdrawals for those expenses. Removing the deduction weakens the account’s overall tax efficiency.
Strategic Planning if HSAs Go Roth
Taxpayers should avoid reactive decisions based on speculation. Instead, they should focus on structured planning.
If Congress adopts Roth HSA treatment, individuals may need to:
- Reevaluate contribution strategiesCoordinate HSA funding with retirement account contributions
- Model long-term tax projections based on expected retirement income
Those with significant medical expenses may still value HSA funding, even without a deduction. Tax-free growth and tax-free qualified withdrawals still provide advantages over taxable brokerage accounts.
Business owners and HR departments should also monitor legislative updates. HSA benefits often serve as a key feature in HDHP-based employer health plans.
HSA FAQ
Are HSAs going Roth in 2025?
No current law requires HSAs to switch to Roth treatment in 2025. Lawmakers have discussed the proposal as part of broader tax reform conversations.
What happens if HSAs become Roth accounts?
Contributions would no longer reduce taxable income. Qualified medical withdrawals would likely remain tax-free.
Why would Congress change HSAs to Roth?
Roth contributions generate immediate tax revenue. Congress may consider that structure to offset the cost of extending expiring tax cuts.
Would Roth HSAs eliminate tax-free withdrawals?
Most proposals retain tax-free treatment for qualified medical expenses. The primary change would affect the deductibility of contributions.
Should I still contribute to my HSA?
If current rules remain in place, HSA contributions offer strong tax advantages. Taxpayers should consult a financial advisor to evaluate personal tax planning strategies.
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Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.