Should I Max out My Health Savings Account Before My 401(k) Plan?Submitted by Reby Advisors | Certified Financial Planners | Danbury, CT on July 20th, 2017
With an HSA, you can put pre-tax money towards medical costs to be used whenever you want. There’s no “use-itor-lose-it” rule — any unused funds will roll over year to year. The main requirement for opening an HSA is having a High Deductible Health Plan (HDHP), a plan that offers a lower health insurance premium and a high deductible. HSAs have a triple tax benefit. The money is tax deductible when you put it in, it grows tax deferred, and you can take it out tax free if used for qualified medical expenses. What’s more, an HSA can be a powerful retirement-savings too.
For people with very low health costs, HSAs are almost a nobrainer, especially in situations where their employer contributes to their account to help offset the deductible. If you don’t spend that money, it’s yours to keep and rolls over year after year for when you do eventually need it, perhaps in retirement to help pay Medicare Part B premiums.
Given that the cost of your health care in retirement could be $200,000 or more, according to industry estimates, using an HSA as a tax-advantaged account just for medical bills is smart.
So, HSA or 401(k)?
Well, maximize both if you can! According to a Wall Street Journal article, many financial experts recommend that those who can afford to contribute to both an HSA and a 401(k) contribute the maximum to both. However, for many folks that is often not doable, so the recommendation is the following. Some experts say if there is no 401(k) match, fund the HSA first. Most agree that, if there is an employer matching contribution, take advantage of that and then direct the next dollars of savings to the HSA. To figure out if a retirement contribution would grow to a larger sum in a 401(k) or health savings account, look to your combined federal & state tax rate and any 401(k) match to make your decision.
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