HSA or 401(k)? Which should come first?

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Workers need to save for retirement. They also need to save for the health care expenses they’ll inevitably have in retirement.

Sometimes, those two responsibilities seem to compete with one another.

Only a quarter of employees prioritize contributing to a health savings account (HSA), according to a new study by Willis Towers Watson, a global advisory and research firm, which surveyed more than 2,000 full-time employees in the private sector. Instead, these employees considered contributing to a 401(k) plan, spending on everyday necessities and paying off debt to be more important. Yet, a majority of these employees (82%) also said medical expenses will be the biggest challenge come retirement.

See: 3 easy ways to invest for retirement — then relax

The unfortunate truth: saving for retirement and saving for health-care expenses when you get there are both crucial, and not exactly the same. Retirement expenses are broad, and include living and lifestyle costs, such as rent or a mortgage, groceries and daily necessities, leisurely activities and vacations and whatever else retirees want out of the next few decades of their lives. Being able to afford medical care is also critical, since it directly influences a person’s ability to stay healthy and afford things like doctor visits, health insurance premiums and potentially long-term care.

The cost of health care is rising, and will continue to do so for the foreseeable future. A 65-year-old American couple retiring in 2018 could expect to spend $280,000 on health care in retirement alone, not including long-term costs, according to a Fidelity Investments study. The estimate has jumped 75% since the company’s first analysis in 2002 (then $160,000). That money goes mostly toward Medicare cost-sharing provisions, including copayments, coinsurance and deductibles, followed by monthly expenses associated with Medicare Part D and B premiums and then prescription drug out-of-pocket expenses.

Health savings accounts aren’t for everyone, but they do have tax advantages. One barrier to entry for many people is that savers can only open an HSA if they have a high-deductible health insurance plan, which means employees have to spend more money out-of-pocket upfront before seeing the benefits of lower premiums. In 2018, high deductible health plans have a deductible of at least $1,350 for an individual and $2,700 for a family. The yearly out-of-pocket expenses can’t be more than $6,650 for an individual and $13,300 for a family. You can contribute up to $6,900 in an HSA in 2018.

Money in an HSA has triple tax benefits: it is invested with pretax dollars, grows tax-deferred and can be withdrawn tax-free if used for qualified medical expenses. Those assets can then be used after 65 for anything, but distributions for nonmedical expenses will be taxed at ordinary income rates.

The greatest of benefits will only be reaped if that money remains untouched. Not everyone understands or follows that advice, however, according to the Willis Towers Watson study — 65% of respondents use their HSA accounts for everyday health care needs, and only 8% focus on saving their funds. That isn’t possible for everyone though. “It is a good strategy for many folks but keep in mind, the reality is there are people in HSAs who live paycheck to paycheck,” said David Speier, managing director of benefits accounts for Willis Towers Watson.

Also see: Find out if a health savings account is right for you

What might be one of the greatest problems employees have when presented with options for an HSA and a retirement plan? They become overwhelmed, Speier said. The health care industry has gotten so complex, as has the retirement savings landscape, with numerous types of accounts and strategies to consider to fund employees’ futures.

“People don’t understand,” he said. “We all have busy lives, how much time can you spend on a topic?”

Employers need to assist their workers by providing financial planning tools that will help them understand their personal situations and where their money will work for them best. One of the most basic strategies, however, if given the option to save in a 401(k) and an HSA (and workers have the funds to do so) would be to save in a 401(k) at least up to the employer match, and then start saving in an HSA, he said.



Source : MTV