HSAs Beat 401(k)s

Your 401(k) may not be the best place to put your money. In a recent article in the Wall Street Journal, Anne Tergesen points out that Health Savings Accounts (HSAs) come with more tax advantages than 401(k)s and individual retirement accounts (IRAs) when used to cover medical costs, a large expense for retirees.

Money in HSAs grows tax-free and, if used for medical expenses, also can be withdrawn tax-free. And if you fund your HSA with a pretax payroll deduction, you also save 7.65% in FICA tax (which finances Social Security and Medicare).

For individuals with a high deductible health plan (at least $1300 for individuals and $2600 for a family), an HSA should be the place to save. Individuals can contribute up to $3350 annually and families up to $6750 with those over 55 years old allowed an additional $1000. The biggest payoff with an HSA comes when the funds in the HSA are not used for current medical bills but are invested and allowed to compound over time, before being used for medical expenses.

It may be the best strategy to contribute enough to your 401(k) to get the company match and then direct the next dollars of savings to your HSA. Consult your estate planning attorney for further information.

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