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401(k) vs. HSA

3 min read

30 sec brief

The 401(k) is the gold standard of retirement savings with dedicated funds to save tax-free money. Tax-free growth only sweetens the deal. Likely why 32% of all Americans have a 401(k). What if there was another tax-saving vehicle that could be used just like a 401(k), but had an extra tax advantage and was for health…

The 401(k) is the gold standard of retirement savings with dedicated funds to save tax-free money. Tax-free growth only sweetens the deal. Likely why 32% of all Americans have a 401(k). What if there was another tax-saving vehicle that could be used just like a 401(k), but had an extra tax advantage and was for health cost as well? The HSA might be the only 2 for 1 deal offered for healthcare and retirement savings.

HSAs are newer to the game, but maybe not outmatched. HSAs were created in 2003, as part of the Medicare Prescription Drug, Improvement, and Modernization Act. They help Americas save and spend pre-tax dollars to pay for qualified out-of-pocket medical expenses. Their primary design was to reduce a consumer’s health cost burden, but their tax structure mirrors many of the same features as a 401(k).

401(k) vs. HSA Infographic

 

HSA vs. 401(k) vs. IRA

HSA Contributions

In order to take advantage of pre-tax payroll contributions of both a 401(k) and an HSA, these benefits must be offered by your employer. But don’t worry, if that is not the case, with your HSA you can deduct those taxable contributions from your taxes each year. 2019 401(k) maximum contributions are $19,000 for individuals. 2019 HSA maximum contributions are $3,500 for individuals and $7,000 for families (Those raise to $3,550 for individuals and $7,100 for families in 2020). Please note in order to have an HSA, you must have an HSA-qualifying health plan.

Tax-Free Savings and Growth

Both a 401(k) and an HSA create tax-free savings and growth. You can save or invest your funds. They can grow completely tax-free. This is an incredible opportunity to save more money and build a substantial financial nest egg.

With a 401(k), generally speaking, you must wait to use those dollars until you are 59 and 1/2 years of age. With an HSA, you can use those pre-tax funds for qualified out-of-pocket medical expenses at any age. After 65 years of age, you can use those funds for anything, just like a 401(k) or an IRA.

A 401(k) has more saving opportunity, but an HSA has more flexibility.

Required Minimum Distributions

One difference between the 401(k) and the HSA is required minimum distributions (RMD).

Unlike a 401(k), an HSA has no mandatory distributions in retirement. You get to decide when and if to use those pre-tax assets or sell investments in your HSA.

Which is better for your savings needs? A 401(k) or an HSA? That is entirely up to you to decide. Craft the savings strategy that works best for your health cost and retirement needs. What should be clear is that there are many advantages to both the 401(k) and HSA to save pre-tax dollars. That means more money for you!

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

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Lively

We are HSA Experts! Lively is a Health Savings Account (HSA) platform for employers and individuals. A 401(k) for healthcare.

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