4 Retirement-Planning Considerations When You Use an HSA or 401(k)

August 15, 2019

The average American believes they’ll need $1.7 million to retire. While each person’s retirement target varies, what doesn’t vary is the types of accounts employees use for retirement planning.

Health Savings Accounts (HSAs) and 401(k)s are two of the best tax-advantaged accounts available, and most HSA participants use the accounts together to help them reach their goals. We’ve compiled four considerations for you to take into account when using an HSA and 401(k) to achieve your retirement dreams. And click below to download your free Securing Your Retirement handout, which makes it easy for you to compare and contrast popular retirement plans.

Retirement planning with an HSA and 401(k)  

Know your goals

To reach a goal, you have to set a goal. Generally, it’s suggested that you have 10 times your final salary saved up if you want to retire by age 67. But that still leaves a lot of questions you should answer, including:

  • What do you think your final salary will be?
  • What will your medical expenses be (based on your history and your family’s history)?
  • Do you want to travel a lot?

“Individuals should really focus on quantifying very specific goals that are measureable and attainable,” said Bell Bank Senior Vice President/Retirement Division Manager Mike Kobbervig. “Then, focus on determining a mix of investments with different risk/return characteristics that can diversify risk and provide an ample return to achieve the goal.”

Know the withdrawal rules

Contributions to an HSA or 401(k) are tax-deductible. However, your ability to withdraw funds from either account (for example, in the event of a family emergency) are different. It’s important to understand any potential tax penalties you could incur when withdrawing funds from either account. That way you’re educated on how to best divvy up your contributions between the two accounts to meet your current and future needs.

With an HSA, funds can be withdrawn tax-free if they’re used for eligible medical expenses. But if you use any HSA funds for ineligible medical or other types of expenses, you have to report funds spent when you file your taxes and pay a 20 percent penalty. The penalty would not apply if you are 65 or older but you would still pay taxes on the distribution for ineligible expenses.

With a 401(k), many plans allow withdrawals prior to age 59½, even while the participant is still actively employed. In those situations, the withdrawals are subject to tax. Distributions made prior to reaching age 59½ must pay tax plus a 10 percent penalty, unless the distribution is due to a separation from service during the calendar year the employee reaches age 55. Minimum 401(k) distributions are required by the IRS once you reach age 70½.

Know your investment options

HSAs and 401(k)s are both great tools for investing, which gives you the ability to grow your funds at an even faster rate than you would if you were to simply place your money in a savings account. A 401(k) is specifically built to serve as an investment account. With an HSA, you have to choose to invest your funds. Often times, that means your HSA balance must reach an investment threshold before you’re eligible to invest your funds.

Another variable is determining what types of investments you want to make within each account. Kobbervig says you should consider the following:

  • Time frames. “You should determine when the money will be needed for the specific goal.”
  • Investment risk. “Try to quantify the risk inherent in the investment option. One proxy for risk could be the standard deviation of the performance of the investment alternative over different time periods.”
  • Emotional risk. “You should determine how much volatility you can endure. An investment could match the risk/return relationship for a particular window of a time and goal for most investors, but doesn’t match the risk/return relationship that an individual can experience comfortably.”

Know your available tools

Retirement planning is complex! Fortunately, there are tools you can use to help you determine and reach your goals. Use our HSA goal calculator and savings calculator to set your goal and to see how much your HSA funds are expected to be worth over time.

There are also calculators available so you can see how much you should expect to need for retirement and to learn how long your retirement savings will last.

Would you like to learn more about how to leverage an HSA and 401(k) effectively? Download your free Securing Your Retirement handout. 

Please note: Discovery Benefits cannot provide legal, investment or financial advice related to the plans we administer and nothing shared in this blog post should be interpreted as such. We encourage you to seek appropriate professional advice regarding your plan. 

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