Comparing a Health Savings Account To A 401(k)

A Health Savings Account (HSA) is a savings medium for people enrolled in a high deductible health plan to save for medical bills that may appear in the future. And due to its features, an HSA might be better than a 401(k). HSA contributions have their way around taxes. The maximum amounts you can contribute for 2020 are $3550 for individuals and $7100 for families. And if you are 55 or older, you can "catch up" with an extra $1000.

Contributions made to an HSA present tax benefits and can be carried over from one year to another. The main idea is to use it for current medical expenses but can be utilized for other types of costs down the road. Suppose the investment choices within the HSA plan are satisfactory. In that case, the individual should think about keeping the contributions in the plan to grow without taxes until retirement unless a considerable medical emergency arises. Any distributions made for medical expenses are wholly tax-free.

Now it's time for the HSA and the 401(k) comparison. The 401(k) allows you to contribute on a pre-tax basis but under the lines of the Social Security and Medicare tax. In contrast, contributions to an HSA are not subject to Medicare and Social Security tax. Both the mentioned options allow the contributions to grow tax-free. With a 401(k), the distributions can be taken out, without any penalties, after the age of 59 and a half. HSA's distributions can be done at any time, penalty and tax-free, for adequate medical expenses, and once you reach the age of 65, they are penalty-free. HSA also can be used to pay for the three parts of Medicare; Medicare B, C, and D, as well as out-of-pocket expenses. Having that covered, it is clear that the advantage of the HSA excels due to its flexibility in distributions and tax treatment.

Deciding how much to add to your HSA and 401(k) comes with a couple of rules. First, countless employers will match up to a certain percentage of an employee’s contribution to a 401(k). If that is the case, make sure you contribute the correct quantity to get the entire match. You may want to consider investing in the HSA before adding more dollars to a 401(k) with that covered. Look at it this way: the HSA has an inherent triple tax benefit that a 401(k) doesn't. Those initial dollars you provide are free of Social Security and Medicare tax.

Second, the contributions made are considered pre-tax. Third, if the dollars are destined on qualified medical expenses, this will result in tax-free and penalty-free distributions. If you don't end up spending your HSA contributions on medical costs (although you probably will), you can handle the account as a retirement one and withdraw them out with the same tax treatment as a 401(k) after the age of 65. Compared to a 401(k), the only problem is losing the ability to take money out of the plan between the ages of 59 ½ and 65 without a penalty.

The benefits and features of The HSA and 401(k) vary but using both as a savings vehicle can add leeway for your future retirement. There are some other rules for HSA accounts and 401(k)s that will benefit your retirement planning that were not covered. For that, you can contact one of our financial advisors.

Copley Financial Group, Inc’s financial and investment advisors are here to help you with whatever you need. We are located in San Diego, CA., and Uniondale, NY., and the team and I will do our best to see you achieve every goal you have.