Healthcare and retirement planning have emerged as top priorities for employers to address with their benefits. A health savings account (HSA) can support both of these vital employee needs.
Will you retire in Florida, or at a cabin in the woods? It really doesn’t matter. The average 65-year-old couple retiring today will need $351,000 to cover healthcare and medical costs in retirement. And even though Medicare helps pay for the healthcare needs of 63 million people, most recipients still spend thousands each year on out-of-pocket expenses. To help you prepare, here is a comparison of three common retirement accounts: an HSA vs. a 401(k) vs. an IRA.
Why investing with your HSA can help
An HSA has comparable — or better — perks than a 401(k) or IRA with respect to healthcare costs in retirement. Just like with a 401(k), you can contribute to an HSA even after Medicare coverage starts. But while you’ll be taxed and penalized if you withdraw funds from your 401(k) or IRA for any reason before age 59½, you can withdraw funds for qualified health expenses from your HSA at any time without penalty. Funds in the HSA transfer from job to job, and there are no mandatory distribution requirements.
The following tables are a high-level summary of the features of the various accounts. You should always consult your tax advisor when considering withdrawals as these rules are complex and may not fit your particular circumstance.
HSA vs. 401(k) vs. IRA comparison chart
| HSA | 401(k) | Traditional IRA | Roth IRA | |
|---|---|---|---|---|
| Eligibility | Must be enrolled in an HSA-eligible health plan. | Must be employed at a business that offers a 401(k). | Must have taxable compensation and be younger than 70½. | Can contribute at any age if you meet certain income requirements. |
| 2024 Contribution Limits | $4,150 self-only; $8,300 family. Catch-up contribution of an additional $1,000 for either if you're over 55. | $23,000 if you're younger than 50; $30,500 if you're 50 or older. | The lesser of $7,000 (or $8,000 if you're over 50) or your taxable compensation for the year. | The lesser of $7,000 (or $8,000 if you're over 50) or your taxable compensation for the year. |
| Contribution Tax Status | Tax-deductible | Contributions can be made on a pre-tax or after-tax basis. | Tax-deductible if you qualify. (Eligibility is based on your retirement plan at work) | Taxable |
| Distribution Tax Status | Tax-free (if funds are used on qualifying expenses) | Generally, distributions are taxable unless a qualified distribution of Roth funds. | Taxable | Tax-free if the distributions qualify. |
| Withdrawal Penalties | The penalty of 20% applies if funds are used for non-qualified medical expenses if withdrawn prior to age 65. Withdrawals for non-qualified expenses are taxable. | Generally, withdrawals are taxable and subject to a 10 percent penalty if withdrawn before age 59½. | Generally, withdrawals are taxable and subject to a 10 percent penalty if withdrawn before age 59½. | Generally, withdrawals of contributions are tax-free. Withdrawals of earnings before age 59½ are subject to tax, plus a 10 percent penalty. If you are over 59½ but have not met the five-year rule, withdrawals of earnings will be taxed, but not subject to penalty. |
| Investment Options | Standard lineup of mutual funds, and more than 8,500 mutual funds and other investment options for savvy investors with our health savings brokerage account*. | Typically, a variety of mutual funds. | Typically, you have a variety of options, including individual stocks, trade options and mutual funds. | Typically, you have a variety of options, including individual stocks, trade options and mutual funds. |
What tax advantages does an HSA share with 401(k) or IRA?
An HSA, 401(k), and IRA can all help employees save money when putting aside funds for retirement. All three accounts provide potential tax savings. And all three are also owned by the individual, meaning that the account stays with the employee whether they remain with their employer or not. That gives the employee peace of mind to lean on these accounts as part of their long-term retirement strategy.
What are the HSA’s perks versus a 401(k) or IRA?
There are two important distinctions related to healthcare costs when comparing an HSA with a 401(k) and IRA:
- Contributions and withdrawals
- With an HSA, contributions made through payroll deductions are tax-free. Withdrawals to purchase eligible medical expenses are also tax-free.
- With a 401(k), contributions are generally tax-deferred, but withdrawals are taxed as any other type of income. Additionally, if one withdraws funds before turning 59½, the funds are subject to a 10 percent early withdrawal penalty.
- With an IRA, there are tax implications for either contributions or withdrawals (depending on the type of IRA).
- Surprise healthcare costs
- HSA participants who are using the account for retirement planning can tap into funds at any time should a need arise. They are only subject to taxes and withdrawal penalties if the funds are spent on ineligible expenses.
- With a 401(k) or IRA, withdrawals prior to age 59½ are generally subject to be included in the accountholder’s gross income, plus are subject to a 10 percent penalty.
Improve your benefits package with First American Bank
Healthcare and retirement planning have emerged as top priorities for employers to address with their benefits. An HSA can support both of these vital employee needs.
With First American Bank as your benefits partner, it’s never been easier to guide your team through the benefits process. Whether you’re interested in 401(k), IRAs, HSAs, FSAs, HRAs, or Commuter Benefits, we have you covered—with expertise, personalized service, and leading technology.
