HSA and 401(k): Making the most out of both benefit accounts

HSA vs 401(k)

Both health savings accounts (HSAs) and 401(k)s are government-regulated, consumer-owned funding vehicles that allow Americans to contribute pre-tax income to save for retirement. But that’s where the similarities end.

Although 401(k)s are a useful and recommended tool for retirement savings, that’s their one and only purpose. HSAs do much more.

HSAs: Multiple uses

Most people don’t think about an HSA as a savings account. Instead, they think of it as an account used to set aside money, tax-free, to pay for healthcare expenses – more along the lines of a flexible spending account (FSA). However, an HSA is also a long-term savings and investment vehicle. The funds you or your employer contribute to the account are yours to keep year after year, allowing you to grow funds over time. In short, you can do three things with your HSA funds:

  • Pay for eligible out-of-pocket healthcare expenses not covered by your insurance plan
  • Save to pay for future healthcare expenses in retirement
  • Invest for growth (once your funds reach an amount set by your HSA custodian)

Note: In order to open an HSA, you must be a part of a high-deductible health plan (HDHP).

HSA vs. 401(k) in terms of fund use:

401(k) or Roth 401(k) HSA
Immediate expenses X
Traditional savings X Money can be used on any future qualified medical expense
Retirement savings


HSA vs. 401(k) in terms of tax benefits

The difference between a 401(k) and HSA also comes into play with tax benefits. HSAs offer the greatest tax benefits – more than a 401(k) or any other benefit account. With an HSA, you can tap into the power of triple-tax savings:

  • Tax-deductible contributions, which reduces the federal income taxes you owe
  • Tax-free growth of funds
  • Tax-free withdrawal of funds, as long as the funds are used on qualified out-of-pocket medical expenses

With a 401(k), you cannot withdraw funds from the account before retirement without a tax or withdrawal penalty.

Tax-free contributions Tax-free earnings Tax-free distributions Tax-free and penalty-free withdrawals for medical purposes*
Roth 401(k)


How do HSAs help with retirement planning?

Healthcare costs continue to rise and have become one of the biggest concerns when it comes to retirement planning. Did you know a 65-year old couple leaving the workforce today can expect to need $280,000 to cover medical expenses during retirement? And this does not even include long-term care, which most of us will need at some point in our life.

Directing savings to an HSA and maxing out your annual contributions, if possible, can help ensure you’re prepared for these rising costs. If you’re fortunate enough to have good health and little need for healthcare-specific savings later in life, you can still access your HSA funds but must pay ordinary income tax on the distribution and wait until age 65 to avoid penalties for withdrawal.

HSA vs. 401(k) in terms of benefit elections and contribution rates

As with all employee benefit options, it is important to assess your options in relation to your unique personal situation. This is true for account contributions as well. The benefit elections and contribution decisions for a single 20-something early in his or her career should be assessed differently than a mid-career professional with the needs of a family to account for. Here are a few things to consider when deciding whether – and how much – to save or invest in an HSA and a 401(k):

1. Take advantage of “free money” – In many cases, the employer (or plan sponsor) will match your 401(k) up to a certain percentage. For example, if your employer matches your contribution to your 401(k) up to 5%, it would be wise to contribute at least up to the 5% threshold to take advantage of the match benefit. Many employers also contribute to employee HSAs, a process known as employer seeding. In some cases, this seed amount can greatly offset the out-of-pocket expenses you’re required to pay as part of an HSA-eligible HDHP.

Tip: In situations where people are financially able to contribute to and invest in both an HSA and 401(k) beyond the employer match, many people contribute enough to meet the matching requirements of each. Then, because the tax savings are greater for HSAs, they contribute and invest further in their HSA before increasing their 401(k) contribution. Check out the tax benefits of each.

2. Forecast your healthcare spending – Consider your personal or family situation for the coming year. If you are expecting any major medical expenses like childbirth, surgery or recurring treatment, you may decide to use HSA dollars to cover the deductible rather than invest.

3. Speak with your financial advisor – Think of your HSA as part of your full financial picture for both short- and long-term needs. Speak with your financial advisor about how your HSA and 401(k) can work together as part of your comprehensive financial plan.

HSA + 401(k): A winning strategy

The major advantages of an HSA don’t negate the need for a 401(k). Consider electing both accounts to maximize your retirement strategy. Meanwhile, enjoy the savings you can reap from HSAs on current healthcare expenses.


*401(k) plan participants may be able to take withdrawals for an immediate and heavy financial need. See the IRS rules on hardship withdrawals.

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