Which to Max First: 401k or HSA?

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ZeroWealth
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Which to Max First: 401k or HSA?

Post by ZeroWealth » Wed Jan 17, 2018 9:47 am

My employer opened up an HSA option this year, where they will be contributing $800 towards the max family limit of $6,900. They also have a 401k program where they match 50% of 6%. I'm wondering which of these to focus my efforts on maxing this year and looking for your suggestions. I maxed the 401k last year, but the triple-tax-advantaged nature of the HSA is really appealing. At minimum, I'll be contributing 6% towards my 401k to get the full employer contribution.
"I seldom end up where I wanted to go, but almost always end up where I need to be." - Douglas Adams

retiredjg
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Re: Which to Max First: 401k or HSA?

Post by retiredjg » Wed Jan 17, 2018 9:54 am

I see no reason not to get the match on the HSA. How much do you have to save there to get the full match? After meeting both matches, put the rest in the 401k.

Or is the problem that you are not able to save that much?

Topic Author
ZeroWealth
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Re: Which to Max First: 401k or HSA?

Post by ZeroWealth » Wed Jan 17, 2018 10:04 am

retiredjg wrote:
Wed Jan 17, 2018 9:54 am
I see no reason not to get the match on the HSA. How much do you have to save there to get the full match? After meeting both matches, put the rest in the 401k.

Or is the problem that you are not able to save that much?
Hi retiredjg, thanks for your thoughts!

For the HSA, they will contribute the full $800 regardless of how much I put into it, so even putting zero of my own money in, I'll still end up with something at the end of the year.

Right now, we aren't able to max everything (401k/HSA/Roth IRAs), so we have to pick and choose. I'd even be open to lowering our Roth IRA contributions in order to max our 401k. I expect our tax bracket to drop in retirement (25 years out), so perhaps maxing the HSA and 401k first before Roth IRA might be the better choice, since we'll be saving tax dollars today?
"I seldom end up where I wanted to go, but almost always end up where I need to be." - Douglas Adams

ThriftyPhD
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Re: Which to Max First: 401k or HSA?

Post by ThriftyPhD » Wed Jan 17, 2018 10:08 am

See Prioritizing Investments.
Here is a general account funding priority that often works well for many people (not all points will apply to everyone):
  1. Contribute to the work-based plan (401(k), 403b,) enough to get the full employer match (the match is like free money, your best possible investment),
  2. Pay off high interest debt (a guaranteed high return, the next best thing to free money),
  3. Contribute to a Health Savings Account (HSA) if available (unlike many other tax deductions, there are no income restrictions to contribute to an HSA),
  4. Contribute the maximum to an IRA, traditional or Roth (or backdoor Roth technique[note 2]), depending on eligibility and personal circumstances,
  5. Contribute the remainder of the maximum employee contribution to the work-based plan,
  6. Contribute to a taxable investing account,
  7. Contribute to non-deductible IRAs (may be better than taxable in certain circumstances) or annuities.
Last edited by ThriftyPhD on Wed Jan 17, 2018 10:08 am, edited 1 time in total.

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FiveK
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Re: Which to Max First: 401k or HSA?

Post by FiveK » Wed Jan 17, 2018 10:08 am

From Investment Order:
1. Contribute to your 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)

DarkHelmetII
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Re: Which to Max First: 401k or HSA?

Post by DarkHelmetII » Wed Jan 17, 2018 10:09 am

Remember HSA is also tax-free upon withdrawal provided used more qualified medical expenses. Under current law my understanding is that even includes Medicare premiums.

After reaching certain age (forget if its 59 1/2 or something similar) can withdraw paying only income taxes and not any penalties for non-health related expenses. So I personally have a slight bias toward HSA because it's triple tax savings - at contribution, growth deferment, and tax-free upon taking out if used on health related expenses.

retiredjg
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Re: Which to Max First: 401k or HSA?

Post by retiredjg » Wed Jan 17, 2018 10:27 am

Unless you believe you will use it a lot, I'd consider the HSA to be retirement money - so contributing to the HSA is a reasonable substitute for contributing to the 401k. Some people call it a "stealth IRA". The bonus is the HSA money can be used tax free if used for medical bills.

With that in mind, decide what percentage you want in pre-tax and what percentage in Roth, and split it up that way making sure you get the entire 401k match.

I think this is mostly a personal decision - I'm not sure one way is a lot better than another.

TareNeko
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Re: Which to Max First: 401k or HSA?

Post by TareNeko » Wed Jan 17, 2018 10:36 am

The order shown below is financially best option when one wants to save on taxes.
There are some other details though. For instance, you can withdraw your contributions (not earnings) from Roth IRA without penalty before 59 1/2. That may have a value for you.

In your case, you should absolutely contribute enough to get company 401(k) matching. Rest, depending on emergency fund size, job security etc, should either go to HSA or Roth IRA.
FiveK wrote:
Wed Jan 17, 2018 10:08 am
From Investment Order:
1. Contribute to your 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)

jeremyi
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Re: Which to Max First: 401k or HSA?

Post by jeremyi » Wed Jan 17, 2018 10:41 am

I am in a similar situation and am opting to max the HSA rather than 401k or IRAs. The double benefits for health expenses and the flexibility (3 children, #4 on the way, etc) make it a no-brainer for me.

Since I am unable to max all of my retirement accounts, I am taking distributions to cover current year health expenses. In an ideal world, I would then take those funds and increase my contribution to my 401k or IRA accordingly.

Olemiss540
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Re: Which to Max First: 401k or HSA?

Post by Olemiss540 » Wed Jan 17, 2018 10:43 am

ZeroWealth wrote:
Wed Jan 17, 2018 10:04 am
retiredjg wrote:
Wed Jan 17, 2018 9:54 am
I see no reason not to get the match on the HSA. How much do you have to save there to get the full match? After meeting both matches, put the rest in the 401k.

Or is the problem that you are not able to save that much?
Hi retiredjg, thanks for your thoughts!

For the HSA, they will contribute the full $800 regardless of how much I put into it, so even putting zero of my own money in, I'll still end up with something at the end of the year.

Right now, we aren't able to max everything (401k/HSA/Roth IRAs), so we have to pick and choose. I'd even be open to lowering our Roth IRA contributions in order to max our 401k. I expect our tax bracket to drop in retirement (25 years out), so perhaps maxing the HSA and 401k first before Roth IRA might be the better choice, since we'll be saving tax dollars today?
What is your state and federal marginal tax bracket? Do you have sufficient emergency funds available (3-6mo expenses)?

Personally, I would max HSA, 401k, RIRA in that order due to my previous 35% marginal bracket. With the new tax law, that drops to 27% marginal but I am still planning that order as I foresee lower taxes in retirement through lower tax state at minimum.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

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PaddyMac
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Re: Which to Max First: 401k or HSA?

Post by PaddyMac » Wed Jan 17, 2018 11:54 am

We are self-employed and don't get any matches. We fund our HSA first (we've built it up to around $40K now), then our 401k. But we are in early semi-retirement now, and we are starting to get big medical bills. We like the fact that we can get the tax benefit with HSA but we can get access to the money any time - the 401k has a 59.5 yr threshold that we are a few years away from.

So I think everyone's situation is a little different. But if you are thinking of early retirement, then keep in mind that you get access to the HSA any time.

N10sive
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Re: Which to Max First: 401k or HSA?

Post by N10sive » Wed Jan 17, 2018 11:57 am

Do the 401k up to the match limit, then HSA and anything left into the 401k. I would postpone the Roth contributions and put into the HSA since it is a "stealth IRA".

MWormwood
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Re: Which to Max First: 401k or HSA?

Post by MWormwood » Wed Jan 17, 2018 12:02 pm

You should definitely contribute enough to a 401(k) to get the match, and enough to an HSA to cover your medical needs. Those are the no-brainers.

Beyond that, either is good. Some pros and cons:
- which has lower cost investment options?
- which has lower fees?
- HSA pro: You avoid FICA payroll taxes, which you do not avoid with 401(k) contributions.
- HSA con: You usually have to keep some money in a low-interest savings account, whereas with 401ks you can invest it all.
- HSA pro: You can withdraw tax-free for medical costs in the future.
- HSA con: You have to wait to age 65 to withdraw penalty-fee for retirement, whereas 401(k)s can be withdrawn penalty free at age 59.5

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grabiner
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Re: Which to Max First: 401k or HSA?

Post by grabiner » Wed Jan 17, 2018 9:43 pm

Put enough into the 401(k) to get the employer match, but then max out the HSA in preference to anything else.

The reason is that these are the two investments with a big immediate bonus. With a 50% employer match, you get an immediate 50% return on money put into the 401(k). And with a tax deduction on HSA contributions and no tax on withdrawals, you get an immediate 28% return on money put into the HSA in a 22% tax bracket, because $780 of your money becomes $1000 which grows tax-free.

In contrast, while a Roth IRA is a good investment, you have to put in a full $1000 to get $1000 growing tax-free there. And while it does cost you $780 to put $1000 in your 401(k), that $1000 is less valuable because any withdrawals will be taxed.
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