Not All Retirement Accounts Are Created Equal

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Understanding the tax difference of a 401k, IRA, and HSA will make it clear to where you should be making your first dollar retirement savings.

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Planning for retirement takes financial know-how and prudent savings. Understanding the tax difference of these accounts (401(k), IRA, and HSA) will make it clear to where you should be making your first dollar retirement savings. We will review those account details.

Quick Retirement Account Refresher

The value of retirement accounts is very clear. They offer tax-free savings (401(k)s & HSAs), tax-free interest gains and even tax-free distributions (HSAs only). You get to keep more of the money you save. Their tax structure enables you to invest in your long-term savings and asset growth. From a tax standpoint, here is how these accounts are structured.


The Financial Impact of Tax-Free Withdrawals

One key difference you will note is that HSAs allow for tax-free withdraws when used for qualified medical expenses. Let’s dive into the practical applications of this tax structure on your savings.


As you can see from the chart,  tax-free withdraws create 6 additional years of spending runway. That’s a 40% increase! But wait, you can only use HSA funds, and still not pay distribution expenses, for qualified medical expenses. Good news and bad news here, health expenses are now expected to exceed $280,000 for a couple in retirement. This is on top of Medicare coverage. Your HSA funds can and need to go a long way.

With healthcare expenses so high for retirees, using an HSA and their tax-free withdraws for medical expenses will mean more spending-value for you.

Retirement Funding Scenarios

401k Contribtion Scenario

Start with employer match and contributions – The first rule of savings, is always to take the FREE money. If your employer matches your 401(k) it doubles your yearly savings. This helps build your retirement savings at double speed.

Unlike employer 401(k) contributions, HSA employer contributions independent of your HSA savings. Anyone can contribute to your HSA, any contributions count toward your yearly maximum. Based on the tax-free distributions of an HSA, without employer 401(k) contributions, you should consider maximizing HSA contributions before 401(k) contributions.

Please Note: After the age of 65, Any HSA funds that aren’t used for qualified out-of-pocket medical expenses can be used for anything just like a 401(k). 

Investing in your retirement accounts means increasing your financial well-being. Understanding the subtle tax structures of a 401(k), HSA, and IRA will help you get the most from your savings.

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.