When it comes to investments, it can be hard to know where to start. That’s especially true when it comes to investment options that not everyone knows about. In this guide, we break down all things HSA vs 401k to help you see how you might consider prioritizing your investments.
Created in the 1970s, the 401K is now a household term, with nearly 60% of the American workforce having access to them. However, there’s a new kid on the block. The HSA was born in 2003, and many of us are just starting to hear about this investment option.
Let’s explore how both 401ks and HSAs can help your financial future. Watch or read the full article below.
HSA Overview
A health savings account, or HSA, is a specific type of savings account that allows individuals to set aside money to pay for medical expenses. Individuals fund these accounts with pre-tax money. Afterward, individuals pay for qualifying medical expenses with that money.
Some instances of when you may be able to use your HSA include:
- Doctor visits
- Surgeries
- Over-the-counter medications
- Prescriptions
- Femine hygiene products
- Massage and chiropractic care
- Contacts and eyeglasses
One thing to remember is to make sure that your expenses are covered.
Let’s learn more about the advantages and disadvantages of an HSA to see if this account might be the right investment tool for you.
HSA Advantages
One of the biggest benefits to the HSA is that it is a triple tax-advantaged account. According to Shandon, that means that the health savings account allows you to save tax-free, invest tax-free, and spend tax-free. HSA users put money in from a payroll deduction and it continues to grow tax-free. Then, if users follow IRS regulations when spending the money, that money is never taxed.
Shandon also points out that the HSA can be both a short-term and long-term savings option. An HSA allows you to build up money to cover your immediate healthcare expenses. This is especially important with a high-deductible health plan as your deductible amount can be significant.
In addition to covering short-term expenses, HSAs can help in the long term. You can save your expense receipts for as long as you’d like. While you save your receipts, your money is growing tax free inside your HSA investments. Then, you can submit your receipts after 5, 10, or even 30 years to claim all of that money to use in retirement.
Along with the receipt hack that some people use, HSAs, in general, can be instrumental in offsetting the astronomical healthcare costs that many people face at the traditional retirement age and beyond. Though you can no longer contribute to an HSA once you turn 65, you can continue to withdraw money as needed.
HSA Disadvantages
When it comes to the HSA vs 401k, there is one big drawback to the HSA account. Your contributions are much more limited with an HSA. In 2024, an individual can contribute $4,150 per year. A family can contribute $8,300. This lower contribution threshold means that you have less investing opportunity compared to a 401k.
Other HSA disadvantages center on eligibility. While many people talk excitedly about HSAs, it is important to note that only people who have a high-deductible health plan (HDHP) qualify for an HSA.
It is also important to note that some HSA companies can come with higher fee structures. Much like your 401k or any other investment account, paying attention to those details can help you keep more of your money working for you.
401k Overview
A 401k is another investment vehicle that holds your investments. Unlike an HSA that can be used both now and later, a 401k is specifically geared toward retirement savings. A 401k plan can be either traditional or Roth, meaning that you either contribute pre-tax or post-tax money into your account. This investment option is employer-sponsored, meaning that a 401k is a benefit provided by your workplace.
Explore the advantages and disadvantages of a 401k to see if this investment vehicle fits your financial needs.
401k Advantages
One of the best parts of 401ks is how widely available they are. According to Shandon, there are no other prerequisites to having a 401k other than employment. That means that many more people are currently eligible for a 401k than an HSA.
Additionally, you can also contribute a more significant amount of money to your 401k compared to an HSA. In 2024, you can contribute up to $23,000 according to the IRS. There is also a catch-up provision that allows people over the age of 50 to contribute an additional $7,500.
Another part of the 401k that helps it stand out from many investment vehicles is that employers often match a certain dollar amount or percentage of your contributions. Hypothetically, that might mean if you invest $1,000, your employer will also contribute that amount into your account. Of course, there are total contribution limits set by the IRS that both you and your employer have to follow.
401k Disadvantages
Unlike HSAs, you cannot generally tap your 401k to cover current expenses without incurring a penalty. Legislation passed during the pandemic temporarily allowed for some flexibility there. However, most personal finance experts advise against taking money from your retirement account to pay for the present day.
Another issue that some people may face with 401ks is the income limits. If you are what the IRS considers to be a highly-compensated employee, you might be subject to restrictions in terms of what you can contribute.
Other things to be aware of when it comes to 401k investments are related to additional costs. Making sure that you are aware of associated fees and even one-time charges related to certain investment funds can help you keep more of your money working toward your retirement.
HSA vs 401k
When it comes to knowing which investment vehicle might be right for you, it is helpful to consider other aspects of the account. In the breakdown below, we detail everything from tax advantages and ease of use to employer match and fees of HSAs and 401ks.
Tax Advantages
Firstly, remember that your HSA gets special tax treatment. It’s triple tax-advantaged because the money you contribute is tax-free. Plus, your HSA investments can grow tax-free and can also be used tax-free. Like all investments, though, you have to adhere to the guidelines to avoid incurring penalties.
The 401k is not triple tax-advantaged. Instead, a traditional 401k can help you lower your adjusted gross income for the current year. However, your money is taxed in retirement. Conversely, a Roth 401k is funded with post-tax dollars, meaning what you withdraw in retirement is tax-free.
Learn more about how I'm taking full advantage of all the tax advantages of HSAs here.
Ease of Use
401ks probably win the prize in terms of ease of use because they are the investment vehicle that most Americans are familiar with. That means that not only are workers already at least vaguely familiar with the concept, there is also a vast range of options in terms of where and how you invest your money. One drawback to the 401k is that you cannot use the money until retirement without incurring a penalty.
HSAs, especially through platforms like Lively, can also be really easy to use. You make your contributions electronically like any other online deposit and then can use a debit card for qualified expenses. Of course, you can also use your HSA now and later in life.
However, since HSAs are new, there is still some confusion surrounding them. For instance, some people think of an HSA like a flexible spending account, or FSA. They then mistakenly believe that an HSA is a use-it-or-lose-it account. Shandon points out that HSA money is free to grow throughout your entire life.
Employer Match
When it comes to 401k accounts, there is often an employer match. Shandon points out that many people consider this “free money”. What this employment benefit means is that your workplace will match a certain amount of what you put into your 401k.
While HSAs do not have employer matches, there are many workplaces that contribute to the account. In fact, Shandon says that many employers cover at least some of the first-dollar expenses to help you pay your medical expenses until you reach your deductible. Common numbers include $1,000 or $1,200.
Investing Options
In the HSA vs 401k shakedown, investing options are similar. The one benefit of an HSA is that you should have more flexibility in terms of choosing which company or app you open your account with. Still, both the 401k and HSA allow you to make regular contributions from your paycheck and have investing thresholds.
Learn more about investment strategies that you might use for both accounts here.
Fees
When it comes to HSA vs 401k debate, both investment types sometimes force you to contend with high fees. Fortunately, there are low-fee options through index funds. To avoid these fees, investors need to do their due diligence, researching fee structures, and other costs before opening an account.
Final Thoughts on HSA vs 401k
Many individuals are trapped with analysis paralysis when it comes to investing. They spend so much time contemplating the best move that they delay making any move.
To help you move forward with the HSA vs 401k debate, consider your eligibility for the two investment types. Then, you might start by reviewing your matching options. If your company offers a 401k match, then you may want to try to contribute enough to get the match each year. After that, you may also consider funding an HSA, especially if your employer is also contributing to that account.
Both accounts are something that your future self will thank you for. So maybe when it comes to the HSA vs 401k battle, it’s really a tie.
If you're going the HSA route, consider Lively as a smart way to save and invest for your future health care costs.
Who do you think wins the HSA vs. 401k debate? Are you investing in an HSA?
Please let me know in the comments below.
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