401k vs HSA savings

Mirwen · Post by **Mirwen** » Tue Jan 10, 2012 2:42 am

I need a little help making a decision on where to park my savings.
Here is some pertinent background info:
My husband and I are in the 10% tax bracket and we don't have enough income to max out both the 401k and HSA accounts we have. We currently contribute 8% to the 401k and 2k per year to the HSA. We just discovered ERE about 6 months ago and we are on an ER plan. This month we just finished our big push to pay off our car. This means we have about $500/ month freed up to save. I was originally planning on putting another 4% into the 401k and increasing that until I have enough to pay for "normal" retirement at 65. (This should take about 6 years). After that we want to invest in residential rental property for our ER. (Yes we have experience as both a Realtor and property manager.) However, just as I was about to hit "send" on the 401k increase, it occurred to me that I may want to increase the HSA instead.
Since the HSA is funded directly from the paycheck, no FICA is assessed on the HSA monies unlike the 401k funds. However, I don't like the investment choices in the HSA and I do like the choices in the 401k. Also, I really see the 401k account as retirement funds and untouchable. I see HSA funds as something to use for every medical expense.
Since HSA funds can be withdrawn after age 65 just like a 401k and my current goal is to save enough for age 65 retirement it seems silly to pass up the guaranteed 5.65% return of the HSA over the 401k. But something is making me uncomfortable about putting my retirement savings in the HSA and I can't figure out what it is.
What would you do?

Hoplite · Post by **Hoplite** » Tue Jan 10, 2012 3:46 am

@Mirwen,

I just made the same decision in favor of the HSA for 2011. Several reasons in addition to the financial ones you mention:
1. HSA was underfunded IMO for likely needs (deductible and dental costs)

2. Smaller amount(s) mitigates effect of poor(er) investment choices

3. With the health care law, there is some chance the HSA could disappear

4. DENTISTS!
I don't intend to keep more in the account than I reasonably can see needing to spend. Due to #4 above this can get higher than one might think! Better to pay it in part with tax money.

dragoncar · Post by **dragoncar** » Tue Jan 10, 2012 4:59 am

"Since the HSA is funded directly from the paycheck, no FICA is assessed on the HSA monies unlike the 401k funds."
I'm not sure I understand this. Is 401k not also funded directly from the paycheck, and exempt from FICA? Edit: It looks like HSA is FICA exempt and 401k is not, but 401k is still funded directly from my paycheck.
I would do 401k first for the following (personally applicable) reasons.
First, I don't think CA allows a deduction for the HSA.
Second, my HSA investment options suck. It's either $3/mo for the investment window, or some minimum deposit has to be kept in the HSA. The HSA pays around 0.000000001%. Right now my HSA balance is small, but eventually I'll have enough in there for this to make sense.
Third (correct me if I'm wrong) HSAs do not allow early distribution such as by substantially equal periodic payments. I don't think 401k allows this either, but if you need the payments, you likely are separated from your employer, so you can roll over to IRA and do the SEPP. Therefore, the 401k has more flexibility.

Dragline · Post by **Dragline** » Tue Jan 10, 2012 5:30 am

I purposely leave our HSA contributions in cash, because they are easy to spend on drugs and the like, and are really a form of self-insurance. The 401(k) money is much more restricted.
The real benefit to the HSA is the tax deduction up front and then getting to spend that money right away. The "investment" component of the HSA seems more geared to generating fees for the operator than anything else. You can be more aggressive with investments elsewhere.
I would put the money in the HSA until it looked like you had 3-5 years of uninsured medical expenses in it, recognizing that you will have larger medical expenses sporadically. Then start funding the 401(k). You need to assess how much you use in medical per year, though.

dragoncar · Post by **dragoncar** » Tue Jan 10, 2012 5:43 am

My cumulative medical expenses for the past 10 years have been like $100 for an emergency room copay. So I'm currently saving for potential expenses much later in life. For me, I'm far more likely to access my 401k in sepp (after rollover) before touching my hsa. Even if I did have an expense, I'd opt to use post-tax cash. The only reason I put anythin in the hsa is the tax deferred nature.
I think the answer is highly dependent on each persons circumstances.

Mirwen · Post by **Mirwen** » Tue Jan 10, 2012 6:16 am

Thanks for your input. It really helped me to hit on some key points that I hadn't considered before. Some good things about the 401k (aside from investment options) are the ability to roll over into an IRA (for even more option) and some protection from bankruptcy/seizure/consideration for fin aid for school and some other things. I don't know if any of these are true for HSA yet. I haven't heard of any exceptions of HSA funds for consideration in any of these situations.
So I do plan to put most of my funds in the 401k. However, my HSA was just started last year and is still underfunded, so for now I've done a bit of both.

MacGyverIt · Post by **MacGyverIt** » Tue Jan 10, 2012 6:28 am

Anyone taken a look at the Vanguard HSA? The options look pretty good (granted I am not an expert investor):
https://hsaadministrators.info/vanguard-funds-list
@Dragline - "I would put the money in the HSA until it looked like you had 3-5 years of uninsured medical expenses in it, recognizing that you will have larger medical expenses sporadically." --- thanks for this notation, I didn't realize until now that you could continue to contribute to the HSA beyond the annual (in 2012) cap of $3100, the idea that we can contribute up to $3100 annually for years (how long?) into these accounts is very encouraging.
Clearly I need to find some better informative HSA websites...

Dragline · Post by **Dragline** » Tue Jan 10, 2012 2:00 pm

Yes, the HSA amount is a yearly contribution amount. For a family, its over $6K now.

jennypenny · Post by **jennypenny** » Tue Jan 10, 2012 2:14 pm

Dragoncar--It's my understanding that you can't tap the HSA early like a 401k, but you can use the money to pay health insurance premiums after you've left your employer. I think that's a decent perk. You can put enough in to cover insurance premiums during the gap between retiring and Medicare. At least then you'll still be using pretax money for premiums.
I think only NJ and CA limit HSA deductions so maybe they'll eventually conform making them more attractive.

Dragline · Post by **Dragline** » Tue Jan 10, 2012 4:39 pm

Actually, you can access it early and often. You can use it to pay any out-of-pocket medical expenses not covered by insurance, including dental and eye care, chiropractors, acupuncture, any deductibles, co-pays, prescriptions and the like. That's why it works so well with a high deductible insurance plan.
Here's a link with more info: http://www.hsaeducator.com/hsa-rules-for-consumers/

jennypenny · Post by **jennypenny** » Tue Jan 10, 2012 4:57 pm

@dragline--sorry if I wasn't clear. I understand you can take the money out for medical bills, but apparently dragoncar is a superhero and doesn't have medical bills so he wouldn't want that money tied up in an HSA unless he could use it for something else.
I like that link. I hadn't seen that one before.

Mirwen · Post by **Mirwen** » Tue Jan 10, 2012 5:24 pm

@jennypenny
The way I understand HSAs, you can use the funds to pay for cobra coverage, but not regular insurance premiums.
This article has a lot of great info I didn't know before, like how to use the HSA as an emergency savings account.
http://www.hsaresources.com/pdf/Whitepa ... sights.pdf

jennypenny · Post by **jennypenny** » Tue Jan 10, 2012 5:55 pm

Mirwen, you're right. We'd never roll anything over so I guess I wasn't paying close enough attention. Thanks.
I can't get that white paper to load. I'll try when I get home.