Last week, I talked about the tax benefits of Health Savings Accounts. Today, I will answer a very common question asked about HSAs

How do you prioritize saving in an HSA vs saving in a 401K?

So, here is the question: Let’s say you are eligible to contribute $7,100 towards HSA and another $19,000 towards 401K this year,

How do you prioritize?

In other words, do you maximize your HSA first and then start contributing to your 401K

or

do you maximize your 401K first and then start contributing to your HSA

Well, the answer is not that straightforward.

One big factor that comes into play is whether your employer has a 401K match or not.

If there is no employer-match to your 401K,  Maximize HSA first.

Why?

Because the money saved in an HSA could be fully tax-free, unlike the money saved in a 401(K) where the distribution is always taxed.

Now, what-if your 401(K) plan offers an employer match?

It gets trickier in this case

Because you don’t want to lose the “free” money employer offers

So, consider doing things differently.

First, contribute to your 401K up to the limits of your employer match. Then, maximize your HSA contribution.

And, if you can save even more money after the HSA contribution, sure, maximize your 401K contribution

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