04 Jul Choosing 401(k) or health savings account
Photo: ronnieb/morguefile.comQ. I’m 50 so I can start catch-up contributions to my 401(k). I don’t have enough money to do that and save in my health savings account. Which should I do?
— Still working
A. It’s great that you want to save more.
Those over age 50 can save an additional catch-up contribution $6,000 to a 401(k) or 403(b) in 2016, while you can save $3,350 for an individual and $6,750 for family in a health savings account, or HSA.
With regards to tax benefits, HSAs surpass 401(k)s, said Stephen Craffen of Stonegate Wealth Management in Oakland.
“For both types of account, contributions are pre-tax (or tax deductible) and grow tax-free,” Craffen said. “With a 401(k), distributions are taxable. When used to pay for qualified medical expenses, HSA distributions are not.”
Due to the extremely high probability of needing medical care in retirement, using an HSA as a savings vehicle — in addition to more traditional methods — is a good idea, Craffen said.
The biggest hurdle to overcome with this strategy is leaving that account alone until retirement and not using it for current medical expenses.
Craffen said you should remember that funds used for non-qualified medical expenses or non-medical expenses are subject to a 20 percent penalty.
And if are eligible for Medicare, the HSA distributions are subject to the penalty and are recognized as ordinary income, which means taxes, Craffen said.
It’s a balancing act.
Craffen said if you have individual coverage, you may be able to contribute to your HSA and also contribute a portion toward the 401(k) catch-up.
“As long as you are contributing to your 401(k), and the inquiry is solely on the catch-up contribution, you should contribute to your HSA,” Craffen said. “The funds will be available for medical expenses in the meantime, but if you’re able to maintain a balance until you retire, you can still take advantage of the non-taxable distributions for medical expenses when they arise.”
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This post was first published in July 2016.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.