Benefits Buzz

HSA or 401(k)?

Posted on August 7th, 2015

In a perfect world we would all save as much money as we could for retirement, but the reality is the average person has a limited amount they can save for the future. That being said, some Health Savings Account (HSA) advocates are saying employees should consider funding an HSA before a 401(k) or other retirement savings vehicle. Advocates stress that HSAs have one leg up on 401(k) plans because of a triple tax advantage feature.
  1. HSA contributions are tax deductible……just like 401(k) contributions.
  2. HSA funds can be invested and earnings grow tax-deferred……just like 401(k) funds.
  3. HSA funds can be withdrawn in retirement tax-free for medical expenses……unlike 401(k) withdrawals.
And, when you think about retirement, what comes to mind?  New sports car?  How about a nice house on the beach?  Maybe even a new boat?  Or the $220,000 you can expect to pay on medical expenses?  You read that right! According to Fidelity Benefits Consulting, that’s the amount of money the average 65 year old married couple will need in today’s dollars to cover medical expenses in retirement. HSA funds can be withdrawn for these expenses, including Medicare premiums (other than Medicare Supplement premiums), without any tax consequence.  
Some other differences between an HSA and 401(k) are also noteworthy:
  • Money can be withdrawn tax-free for qualified medical expenses from an HSA at any age (before or after retirement). 401(k) funds can be accessed tax-free prior to retirement for things such as purchasing a home, but the funds must be repaid over time with interest.  
  • Eligibility to make contributions to an HSA requires enrollment in a qualified high deductible health plan. This is not applicable to 401(k) plans.   
  • HSAs have a 20% penalty if funds are withdrawn for non-qualified expenses, and the penalty is waived after age 65. 401(k) plans have a 10% penalty if funds are withdrawn early, and the penalty is generally waived upon reaching age 59 ½. 
  • 401(k) plans have required minimum distributions that must be taken from the account at age 70 ½ to avoid a 50% excise tax. HSAs have no required minimum distributions.  
Annual contribution limits are also different, and employers who match contributions to HSAs and/or 401(k) plans should also be taken into consideration, but at the very least, employees should recognize the options that are available. Next time you hear somebody reference a “medical IRA” or “medical 401(k)” they’re probably talking about an HSA.  HSAs can be utilized similarly to these retirement accounts but with some unique and differing attributes.  
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The materials contained within this communication are provided for informational purposes only and do not constitute legal or tax advice.


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