Fully Funding a 401(k) vs. Roth IRA vs. HSA

The federal government permits many qualified account options that allow you to save and invest money at preferred tax rates. In the past several decades, the move has been from primarily pension accounts to a diverse range of 401k options, individual retirement account (IRA) options, and even health savings accounts (HSA). Each of these options presents different benefits both in terms of taxes and usage.

If your employer provides retirement benefits, it is often, though not always, in the form of a 401k. A 401k is a personal retirement account that is managed and, at times, supplemented by your employer. You will be able to directly deposit funds out of each paycheck into your retirement account. Your company may match these funds, but this is up to each company. You may deposit up to $16,500 annually, as of the time of publication. This money will be taken from your paycheck after FICA and Medicare has been paid. You will not pay taxes on the money up front, but you will pay taxes when you withdraw the money in the future.

Not all IRA's use the Roth structure, but you have the option to elect the Roth structure when setting up an IRA. With a Roth IRA, you will personally deposit funds into your retirement account after you have paid all taxes, including income, FICA and Medicare. The advantage on a Roth is on the back end; you do not pay taxes on earnings in the account even once you withdraw the funds at or after minimum retirement age of 59 1/2. You can only put $5,000 into this account if you are under 50 as of the time of publication. If you are over 50, the maximum is raised to $6,000.

An HSA is designed to allow you to put pre-tax dollars into an account that is only used for health expenses in the current year or in the future. Your employer may offer an HSA, and it depends on the plan structure to determine whether you must spend all the money this year or you can roll the money over year after year. The money is placed into your HSA before any taxes, including FICA and Medicare, have been paid. As of the time of publication, the maximum contribution begins around $3,050 for a single person on a high deductible plan and may reach to $6,150 for a family. Many people consider using the HSA for retirement savings because, while you can only use the money for qualified medical expenses prior to age 65, you can make any withdrawals you like after age 65 and pay only the current tax rate.

While it may seem prudent to use your HSA first because you do not pay FICA or Medicare, keep in mind you cannot invest the money in your HSA while it is in the account. So, there is no tax advantage on the investment dollars and no growth in the account. With a Roth IRA, there is relatively no benefit in the current year since the contributions are not tax deductible. However, you will receive a great benefit in the future by growing and withdrawing your dollars tax free. The 401k has the most current year benefits, and it also has the highest contribution limits of the three options. Ultimately, most investment professionals will recommend using a mix of these accounts to save you the most money. For example, contribute what you think you will need for health expenses this year into your HSA first, then deposit a portion of your savings up to the annual maximum into a Roth IRA for future benefits, and close by depositing funds into a 401k up to your total annual limit for all accounts. However, your mixture may be different if, for example, your employer matches 401k contributions. In conclusion, the best option for savings depends on what each account can offer you not only in tax benefits but also in supplemental benefits now and in the future.