Contributing to your 401(k) and HSA are both good ways to save for the future. Which account is better depends on the account holder’s situation.
“A 401(k) is specifically designed for retirement savings, whereas a health savings account (HSA) is intended for medical savings, though it has appealing perks for retirement savers as well.” (1) The chart below highlights the differences between the plans.
| Traditional 401(k) | HSA Plan | |
| Contribution through payroll deduction | Contributions are not taxed | Contributions are not taxed |
| Company match | Some Employers | Some Employers |
| Interest and earnings | Tax-free | Tax-free |
| Requirements to withdraw | None, except minimum withdrawal required after age 72 | None |
| Annual contribution limits | $20,500 or $27,000 if over age 65 | $3,650 individual / $7,300 family |
| Other Requirements | Must be enrolled in a high-deductible health plan | |
| Withdrawal tax and penalties | Penalty on withdrawals before age 59 1/2. Subject to ordinary tax only after age 59 1/2 | Penalty on withdrawals before age 65. Subject to ordinary tax only after age 65. Withdrawals to pay health care expenses remain tax-free |
| Portable | Yes | Yes |
Both plans offer excellent ways to save. The main advantage of HSA is that it can always be spent on healthcare on a tax-free basis. And there will always be healthcare expenses. On the other hand, 401(k) plans have a higher contribution limit and allow for penalty-free withdrawals at a younger age (age 59 1/2). The employer’s contribution-matching policy may drive which of the plans is better for employee contributions. Employees should contribute to the plans in a way that maximized their company match.
One final comment on a different type of 401(k), the Roth 401(k). With the Roth 401(k), contributions are taxable at the time they are made, but there is no tax on withdrawals if the employee is over the minimum age. Especially for young contributors, where the bulk of the 401(k) plan amount will be based on earnings, this can be the best vehicle for savings.
(1) https://www.fool.com/retirement/plans/hsa/hsa-vs-401k/
(2) https://www.benefitspro.com/2022/05/18/dont-let-your-clients-bank-on-medicare-in-retirement/