Should an HSA or 401(k) Come First

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People should prepare for retirement even at the start of their careers. The goal of having enough money when old age comes seems to compete with increasing health care expenses. An HSA or Health Savings Account is like a personal savings account dedicated to medical expenses. A 401(k) is a savings account that accumulates based on how much the contribution is. Its main goal is for a person’s retirement expenses. Which one should you prioritize, and which should come later on?

Save for Both Retirement and Health Care 

Retirement is inevitable, and so are medical expenses as you age. That is why people have to save for retirement and health care expenses. Only about a quarter of the working population places contributions to a health savings account. 

A global research and advisory firm observed at least 2,000 full-time private-sector employees. These employees prioritized paying debts, daily expenses, and a 401(k) plan. Even so, about 82 percent of the same employees said that medical expenses would probably be a major expense upon retirement. 

Sometimes, it is difficult to choose between a 401(k) and HSA. But the truth is that even if they are not precisely equal, saving for both can be vital. One’s retirement expenses will include lifestyle and living costs. It will cover groceries, daily needs, mortgage, and leisure activities. It is also very important to have a good estimate of what your health care expenses will be in retirement as this expense will have a large impact on when you can retire and if you can do so without running out of money in retirement.

The money will go to whatever retirees want to do. Paying for medical care is also crucial. Your ability to pay will set the kind of care you will receive upon retirement. This will determine if you can pay for your long-term care, insurance premiums, and doctor’s appointments. 

Health care costs continue to rise. An American couple retiring in 2022 would pay an expected $300,000 on health care expenses during retirement. A Fidelity Investments study says that this will not include the long-term costs. This is an 88 percent jump from the 2002 estimate of $160,000. 

Most of the funds will go to Medicare’s cost-sharing. This will cover deductibles, coinsurance, and copayments. Then, there are monthly payments for Medicare Part B and D premiums and out-of-pocket payments for prescription drugs. 

An HSA may not be for everyone, but it does have tax advantages. The main problem for most people to start an HSA account is the condition of having a high-deductible health insurance plan. If you don’t have one of these plans, you cannot get the tax benefit of an HSA account. 

A high-deductible health plans set a deductible of $2,700 for a family and $1,350 for an individual. Annual out-of-pocket expenses cannot exceed $6,650 for one person and $13,300 for a whole family. A couple can put in a maximum of $7,200 in an HSA account in 2021. 

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An HSA has three tax benefits. It grows free of tax and is invested with pre-tax dollar funds. You can also withdraw it tax-free for any qualified medical expense you may have. These funds can be for anything after 65 years of age. However, HSAs will be taxed at regular income rates if used for non-medical purposes. 

Untouched HSAs can still give you the many benefits. This is not a piece of advice many people follow or understand. Yet, according to a Willis Towers Watson research, about 65 percent of their respondents spend their HSA funds on daily health care needs. Only about 8 percent of them focus on saving the funds. The managing director of benefits accounts of Willis Towers Watson says that saving HSA funds is not a reality for everyone. The fact that many people live paycheck to paycheck proves this. 

How Employers Can Help

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Employees often feel overwhelmed with the different options for a retirement plan and an HSA account. This is a common problem in planning for their future.  Employees should have the proper guidance when it comes to these two savings plans. 

Employers must help their employees invest in both types of savings accounts. Discussing individual financial situations can lead to the best budgeting strategy. This can then help employees adjust how they handle their savings. An ideal option is for an employee to save in a 401(k) up to an amount the employer can pay. Then, the employee can start saving for an HSA. 

Many employees need their employers’ support to prepare for retirement. Educating employees can help them learn money-saving and budgeting techniques. Employers can provide on-site financial advisors, online retirement tools, budgeting workshops, and investment webinars to help their employees. 

Employers can also motivate employees by adding more to their 401(k) contributions. Meeting with a financial advisor can help employees keep a close eye on their retirement funds. Basic 401(k) contribution rates with an employer’s help can go up to 10 percent. The rates without employer contributions only reach below 8 percent. A considerate employer can help employees reach their retirement and HSA goals. 

Disclaimer: This content does not necessarily represent the views of IWB.

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