Your HSA Is Better than Your 401(k) for Retirement Savings. Don’t Waste it on Actual Health Care Costs.

Like you, I’ve been going through Open Enrollment lately. Only I’ve been going through a whole bunch of open enrollments, for all of my clients. (It’s actually pretty cool, being able to compare—and, perforce, contrast—what a variety of tech companies offer to their employees.)

One conversation I keep running into is how you should best use a Health Savings Account (HSA), which you can get if you select a high-deductible health care plan.

So, let’s start with the end of the story:

Your best use of an HSA is to save for retirement, not to pay for current health care costs.

Now let’s get into the “hunh?” and “but how?” part of the story.

[Sheepish note: I don’t usually write about topics like these, topics that are covered by every financial blogger and news outlet out there. But I’ve had enough confused conversations with clients about it, and so many women in tech can take advantage of this opportunity—because they have access to HSAs and can actually afford the strategy—that I figured it’d help to have it called out explicitly in this blog.]

Why an HSA Is Better than Your 401(k) for Retirement Savings

Most tech companies I’ve seen offer pretty good 401(k)s. The best ones allow:

1. Roth contributions.
   Roth money is really good to have, as it provides all sorts of flexibility that pre-tax retirement money doesn’t (you can withdraw contributions tax- and penalty-free, you can use it in retirement to minimize your tax liability). However, you probably make too much to be eligible for a Roth IRA. So, Roth 401(k)s are your easiest way to get Roth money.
2. “Roll-in” or “rollover” contributions.
   If you have an old 401(k) from a previous job, you could roll it into an IRA—that is the typical advice after all—but it’s likely better to simply roll it in to your current 401(k), as that keeps everything together and just makes it simpler to invest, oversee, and understand.
3. After-tax contributions.
   You can contribute way more than the $18,500/year (soon to be $19,000) to your 401(k) and get tax benefits from it, not now, but as your money grows and in the future when you take the money out of your retirement accounts.

and, of course,

4. Your company matches your contributions. Typical matching policies are 100% up to 4%, or 100% up to 2% and then 50% from 2% to 6%. In either case, you could get another 4% of your income “free” by making a certain minimum contribution to your 401(k).

You certainly want to contribute enough to your 401(k) to get the match. But after you’ve done that, an HSA is probably going to be the best place for you to contribute your next retirement-savings dollar.

After your 401(k) match, an HSA is a better place than your 401(k).

Because of Taxes

Why? Because of taxes. There are three ways to get tax benefits from a retirement account:

1. Tax savings on your contribution in this tax year.
2. Tax savings when you withdraw the money in retirement.
3. Tax savings between now and then.
   In a “normal” investment account, whenever you sell an investment at a gain or whenever your investments “spit out” income like dividends or interest or capital gains, you have to pay taxes on that income. Inside a retirement account, you don’t. Which means it isn’t dragged down by taxes, even a little bit of taxes, year after year.

A traditional 401(k) gives you #1 and #3.

A Roth 401(k) gives you #2 and #3.

An HSA? It gives you all 3:

1. a tax break this year,
2. a tax break in the year you take the money out (as long as you use it for medical expenses), and
3. tax-free growth along the way.

How much tax savings we talkin’ about?

Let’s start with some simple assumptions:

• You max out an individual HSA contribution in 2019: $3500
• Your top tax bracket (state + federal) is 40% top tax bracket (which, if you’re in California or New York, is quite common)
• You invest your HSA, you don’t leave it in cash, and it grows 8% per year.
• Of that 8% total growth, 2% is taxable income (interest, dividends, capital gains).
• You leave it in the HSA to grow for 20 years.

1. Tax savings now: You’d save $1400 in taxes in 2019. Your Roth 401(k) can’t give you that.
2. Tax savings later: In 20 years, you’d end up with about $16,000. In a pre-tax 401(k), when you withdraw that money, you’d pay $6500 in taxes. With an HSA, you save that.
3. Tax savings along the way: You’d pay about $1300 in taxes over those 20 years if the money were in a taxable investment account.

And we’re not even talking about adding another $3500 each year. This is just for a single year of contributions!

Financial folks talks about “triple tax savings.” Now you know why.

How to Actually Use an HSA for Retirement Savings

My clients, when I’m struggling to explain this off the cuff in a meeting, struggle to understand this one key element of the strategy:

You do not use your HSA money now for current medical expenses. You pay current medical expenses out of pocket, out of current cash flow. Or hell, even out of savings.

Here’s the strategy:

1. You choose a high-deductible health insurance plan that is HSA eligible.
2. You max out your HSA contribution ($3500 for a single person,  $7000 for a family, in 2019).
   • That money gets automatically withheld from each paycheck over the course of a year.
3. Each year you have an HSA-eligible health insurance plan, you contribute that max again.
4. You invest the money in the HSA, just as you’d invest any other retirement accounts, like your 401(k).
   • You do not keep it as cash.  (You might need to keep some minimum amount of it as cash, depending on the HSA provider’s rules. But you’d invest anything above that minimum.)
5. When medical bills arise during the year, you pay for them out of regular cash flow.
   • Just as you pay for your groceries or movie tickets or Amazon purchases.
   • You might even pay for them out of cash savings, if you need to do that in order to make the cash flow work (and allow yourself to get the tax savings of the HSA).
6. In retirement, when you have health care expenses, now you finally take money out of the HSA to pay them.

When You Should (and Should Not) Use an HSA

This strategy obviously depends on you being eligible to contribute to an HSA. And you’re only eligible if you have a high-deductible health insurance plan. In fact, your benefits enrollment paperwork should say very clearly “HSA” somewhere in the title or description of a health insurance option if it is indeed HSA eligible.

But a high-deductible health insurance plan might be wrong for you. It could be very very wrong for you, in fact, if you visit the doctor a lot.  In general:

• If you’re a rather healthy person and don’t “consume” much healthcare—same applies  to all members of your family if you’re covering them—HSAs tend to be more appropriate.
• If you have existing conditions or accident-prone hobbies that you know will drive you to the doctor (or therapist) a lot, a higher-coverage/lower-deductible/non-HSA plan is more likely to be the better choice for you.

I don’t like to get into too many numbers on my blog (what do you think I am, a finance person or something?!), but I know that seeing numbers can be helpful when discussing things like this. So, I can pass along one of my favorite articles about evaluating the many costs involved in health insurance plans, the bane of open enrollment and starting a new job: How I Choose Health Insurance for My Family, by fellow financial planner Matt Becker.

You simply have to understand how your available health insurance plans work to make an informed decision about this. There’s a saying in my profession: “Don’t let the tax tail wag the investment dog.” Which means, don’t make decisions about your investment portfolio primarily for the sake of minimizing taxes. Because investment gains and losses can dwarf the tax savings.

Analogously, don’t let the tax tail wag the health-insurance-plan dog. You first need to understand well enough how your health insurance plans work and your own health history and likely future.

The cost of healthcare can dwarf a few thousand dollars of tax savings. So, only consider a high-deductible HSA plan if you’re pretty sure that your healthcare costs will be low.

Do you want work with someone who can clue you in to strategies for optimizing your finances, like this one? Someone who can help you actually do the things you read about on the Google? Reach out to me at  or schedule a free consultation.

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