HSA vs. 401(k) vs. IRA: Where Should You Be Saving?

July 12, 2018

How prepared are you for retirement? Over 80 percent of Americans aren’t sure how much they’ll need to retire, while 1 in 3 Americans haven’t saved a dime yet. Many experts recommend you save 10 to 15 percent of your present-day income for retirement. So what’s the best account to use for retirement?

HSA and 401(k) 

A Health Savings Account (HSA), 401(k) and Individual Retirement Account (IRA) can all be used to help you prepare for retirement. In fact, bundling two or all of them together is a popular solution. For example, 57 percent of HSA-enrolled employees contribute to both an HSA and 401(k). Here’s a quick breakdown of the details of each of these accounts and more detail below to help you make the best long-term financial decisions.

 

HSA

401(k)

Traditional IRA

Roth IRA

Eligibility

Must be enrolled in a High-Deductible Health Plan

Must be employed at a business that offers a 401(k)

Must have taxable compensation and be younger than 70½

Can contribute at any age if you meet certain income requirements

2020 Contribution Limits

$3,550 self-only; $7,100 family. Catch-up contribution of an additional $1,000 for either if you’re 55 or older

$19,500 if you're younger than 50, or $25,500 if you’re 50 or older

The lesser of:

  • $6,500, or $7,500 if you’re 50 or older
  • Your taxable compensation for the year

The lesser of:

  • $6,500, or $7,500 if you’re 50 or older
  • Your taxable compensation for the year

Taxes - Contributions

Tax-deductible

Tax-deductible

Tax-deductible if you qualify (eligibility is based on your retirement plan at work)

Taxable

Taxes - Distributions

Tax-free (if funds are used on qualifying expenses)

Taxable

Taxable

Tax-deductible if the distributions qualify

Withdrawal penalties

Penalty applies if funds are used for non-qualified medical expenses

Generally, withdrawals prior to age 59½ are subject to be included in your gross income, plus a 10 percent penalty

Generally, withdrawals prior to age 59½ are subject to be included in your gross income, plus a 10 percent penalty

Generally, withdrawals prior to age 59½ are subject to be included in your gross income, plus a 10 percent penalty

 

HSA

Like a 401(k) or IRA, an HSA allows you to grow your funds through investment. So why do some experts encourage you to max out your HSA contributions first before turning to a 401(k) or IRA? One reason is that you can make withdrawals from your account at any time without facing tax penalties, as long as you’re using your HSA funds on qualified medical expenses. And once you’ve reached age 65, you can spend HSA funds on anything without facing a tax penalty.

401(k)

A 401(k) is a retirement plan sponsored by your employer. It carries the same investment potential as an HSA and IRA. However, a 401(k) stands out because of its 2020 contribution limit of $19,500 (or $25,500 if you’re 50 or older). Those limits are much higher than what you’re allowed to contribute to an HSA or an IRA.

Your employer may contribute or match funds to your HSA or 401(k). Find out if they do and make sure to take advantage if so!

IRA

An IRA is a tax-advantaged account through a financial institution that allows you to save and/or invest funds. There are a few different types of IRAs, but the two most common are:

  • Traditional IRA: Your contributions are tax-deductible if you qualify, but your withdrawals will be taxed.
  • Roth IRA: Your contributions are taxed, but withdrawals are tax-deductible if they qualify.

Withdrawals made from a 401(k) or IRA prior to age 59½ are subject to a 10 percent early withdrawal penalty unless you qualify for an exception.

Would you like to learn more about how easy we make HSA investment? Watch our video. 

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