Video: Choosing Between a 401k Account and a Health Savings Account? How to Maximize Your Benefits.

Transcript

(00:00):

Welcome to the Prudent Retirement Planning Channel. This channel is devoted to those of you contemplating your retirement, visualizing retirement or dreading retirement. If you’re within 15 years of that day, this channel is for you. My name is Chuck Lewandowski. I’m a CERTIFIED FINANCIAL PLANNER™ professional.  Today I’m going to address a question that I received from a viewer of my previous video, Why executives and business owners should consider a health savings account.

(00:27):

Logan asked if he should max out his 401k contributions before he adds to his health savings account. That’s a great question. Logan. Many of us have limited funds that we can allocate between employee benefits and both 401k accounts and health savings accounts have great tax benefits. So how do you choose the account that provides a maximum benefit to you? Which one is better? Let’s review some features of each type of account.

(00:57):

A traditional 401k account is a retirement savings account. When you contribute a portion of your salary to a 401k, your taxable income is reduced by the amount that you contribute. In 2021, you can contribute $19,500 from your salary into the account. If you’re over 50 years of age, you’re able to contribute an additional $6,500 to your 401k account as a catch-up contribution for a total of $26,000. Many times your employer will match a portion of your contribution. This match may be an additional four or 5% to your contributions. Although the contributions are tax free as they’re made, withdrawals are taxable at your tax rate at the time they occur. Withdrawals made before age 59 1/2 may incur tax penalties.

(01:51):

A health savings account or HSA is an account designed to allow you to offset the deductibles and copays associated with a high deductible health plan that your employer may offer as a health insurance benefit contributions to this account are like a 401k contribution, tax-free when they are made. In 2021, employees in a high deductible health plan with family coverage are able to contribute $7,200 to the HSA account. If they are over age 50, they can add an additional $1,000 in account for a total of $8,200. Sometimes an employer will also make contribution on employee’s behalf.

(02:32):

Here’s the key difference between an HSA account and a 401k account. Withdrawals from a 401k for any reason in retirement are taxable while withdrawals from a health savings account for qualified healthcare expenses in retirement are not. So, if you can use the HSA as a retirement savings account used to pay healthcare expenses, the funds are tax-free going into the account and tax-free coming out of the account. The 401k not match that feature.

(03:02): So how do you maximize the benefits of both types of accounts? Here’s a potential approach that you may want to take, but you should consult with your tax advisor first. One. Many employers will match your 401k contribution up to four or 5%. If that’s the case, contribute to your 401k up to the maximum match. Why? That’s bonus money from your employer. Two, if you have additional funds, contribute to your HSA up to the annual maximum. Why? You can have tax-free contributions and tax free withdrawals for qualified healthcare expenses. Three, if there’s any money leftover, add that to your 401k deferral of the annual maximum. Why? You gain additional tax free contributions.

(03:50):

If you take these steps, you receive the maximum employer match while taking advantage of the tax free nature of contributions to either account. You prioritize the HSA contributions over the additional 401k contributions to maximize tax free withdrawals.

(04:08):

The health savings account may not be appropriate for everyone. If you require a significant amount of health care services annually, it might not be for you. However, however, if a high deductible plan is your only option, or if you could pay for your healthcare out of your normal savings, it could be a great tax saving benefit in both the short and long term. If you’d like more information about the health savings account and other topics, please visit my website, Charles J lewandowski.com. You can also see a transcript of this video there. I hope to see you soon.

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