HSAs (Health Savings Accounts) and 401(k)s are both valuable savings vehicles, but they serve different purposes and have distinct features when it comes to retirement planning. Here's a comparison of HSAs and 401(k)s:
Contributions: HSAs and 401(k)s allow contributions from both employers and employees. Employers may offer matching contributions or profit-sharing in 401(k) plans, while contributions to HSAs can come from employers and employees up to specific annual limits.
Tax Advantages: Both accounts offer tax advantages but in different ways. HSA contributions are tax-deductible, grow tax-free, and withdrawals for qualified medical expenses are tax-free. On the other hand, 401(k) contributions are pre-tax basis, and earnings grow tax-deferred until withdrawal, then taxed as ordinary income.
Qualified Expenses: HSAs cover medical expenses, and withdrawals for non-medical expenses before age 65 incur a penalty. In contrast, 401(k) withdrawals can be made for any reason after age 59 ½, although withdrawals before that age may result in penalties.
Investment Options: 401(k)s typically offer a broader range of investment options, including stocks, bonds, and mutual funds. HSAs often have limited investment options, with participants needing to meet minimum balance requirements before investing.
Fees and Costs: 401(k) plans are subject to more transparency requirements regarding account and investing fees. HSA fees may vary depending on the provider and include account and transaction fees.
Withdrawal Flexibility: 401(k) plans may allow participants to take loans from their accounts, although this has its implications. HSAs, on the other hand, impose penalties on non-medical withdrawals before age 65.
Considering these factors, we recommend maximizing 401(k) contributions before overfunding an HSA for retirement savings. However, HSAs can still be beneficial for covering healthcare costs in retirement, and if you have the means to max out other retirement plans, contributing to an HSA can provide additional tax advantages and raise the cap on tax-deferred savings.
From an employer perspective, offering a 401(k) plan with matching contributions may be more effective for employee retention. However, if cost savings are a priority, providing an HSA match or incentive for employees enrolled in HDHPs can be a cost-effective option compared to traditional health plans.
In summary, HSAs and 401(k)s have advantages and considerations. It's important to evaluate individual circumstances, objectives, and plan design to determine the most suitable retirement savings options for employees and employers.