If you were to search online for “HSA (aka Health Savings Account) and 401(k)”, some of the results might give the impression that there is a competition to determine which is the best option for saving for retirement. .
In my mind, there is no competition. Choose the 401(k) to save for retirement living expenses; choose the HSA to save for medical expenses in retirement.
Ideally, choose both to accumulate the funds you will need after you retire. Why? It is far too easy to underestimate the cost of medical care in retirement. Recent studies from Fidelity (tinyurl.com/48cnt7ar) show that couples’ estimated health costs cost an average of $315,000, seven times more than people anticipate.
HSAs were introduced in 2004 (Internal Revenue Code Section 223 — tinyurl.com/mr2djpb9), more than 20 years after the 401(k) was created. Today, there are more than 32 million HSA accounts (2021), according to Becoming, an HSA investment advisor and industry consultant (tinyurl.com/285cwx5a).
HSAs are used to pay or reimburse eligible medical expenses and are attached to high-deductible health plans (HDHPs).
Potential benefits of HSAs (from IRS Publication 969, tinyurl.com/2p9x5ytd) include:
You can claim a tax deduction for the contributions you make to your HSA even if you don’t itemize your deductions.
Contributions to your HSA made by your employer may be excluded from your gross income.
Contributions remain in the account until they are used. (This is different from a Flexible Spending Account, or FSA, for which funds must generally be used by the end of the plan year.)
Interest or other income on account assets is tax exempt.
An HSA stays with you if you change employers or leave the workforce.
HSAs and 401(k)s have contribution limits. For 2022, the maximum HSA limit for someone with HDHP coverage is $3,650. For family HDHP coverage, it’s $7,300. (Note that if you are an eligible person age 55 or older, you can contribute an additional $1,000.) Per Tax Procedure 2022-24 (tinyurl.com/55xcywhu), single coverage will be $3,850 in 2023 and family coverage will be $7,750.
Note that once you enroll in Medicare (usually age 65 or older), you cannot contribute to an HSA, although you can still use it to pay for medical expenses.
For 401(k)s, the contribution limit for 2022 is $20,500 (with a catch-up contribution of $6,500 for those age 50 and older). Generally, you can contribute to a 401(k) business if you are still working in that business, regardless of your age.
How are HSAs factored into retirement discussions? Like the 401(k), contributions occur before retirement. While traditional 401(k)s and HSAs are funded with pre-tax dollars, HSA withdrawals are tax-exempt for eligible medical expenses, while pre-tax 401(k) withdrawals are subject to income tax. revenue. (Note that 401(k)s can also be funded with after-tax dollars.)
If you have limited funds, should you fund the 401(k) or the HSA? If you have a 401(k) with a match, contribute enough to maximize the match. Then consider the HSA.
Alternatively, you can maximize HSA contributions each year and spend as little HSA money as possible so that you have the funds to use for medical expenses once you retire. This would work for someone with a pension that covers living expenses in retirement, but not for others who need 401(k) savings.
Again, try to fund both. But be careful. The 2021 Employee Benefit Research Institute reported that 56% of workers who started contributing to an HSA reduced their contributions to a 401(k) (tinyurl.com/4j89n9za). You don’t want to reduce your 401(k) below the amount that maximizes the match.
When it comes to retirement, the goal is to save for as long as possible. HSAs and 401(k)s can play an important role in your long-term planning. If you have both, learn as much as you can about each, then decide how they best fit into your overall plan for a long and healthy retirement.
A seasoned investment advisor (tinyurl.com/52nus8hz) and award-winning columnist and author, Julie Jason, JD, LLM, promotes financial literacy and investor protection. Read his latest book, “The Discerning Investor: Personal Portfolio Management in Retirement for Lawyers (and Their Clients)” (tinyurl.com/4u7h9pjs), published by the American Bar Association. Write to Julie at reader@juliejason.com. While it’s impossible to answer every question, every email is read and reviewed and may lead to discussion in a future column.