Should You Max Out Your HSA Before Putting More in Your 401(k)


For people with very low healthcare costs, putting the maximum into Health Savings Account (HSA) eligible healthcare plans is almost a no-brainer, especially in situations where their employer contributes to their account to help offset the deductible (like mine does).

If you don’t spend that money, it’s yours to keep and rolls over year after year for when you do eventually need it, perhaps in retirement to help pay Medicare Part B or long-term care insurance premiums.

Even if you have higher healthcare costs, HSAs can still be a great deal. I reached the out-of-pocket maximum in my healthcare plan a few years ago, and yet I continue to choose the high-deductible plan solely because I want the ability to max out my HSA contribution.

Should You Max Out Your HSA In 2021 Even If You’re Not Super Healthy?

Because HSA rules allow funds to carryover indefinitely with the triple tax-free benefit of funds going in tax-free, growing tax-free and coming out tax-free for qualified medical expenses, I have yet to find a reason that someone wouldn’t choose to max out their HSA before funding their 401(k) or other retirement account beyond their employer’s match.

HSAs Offer Even More Tax Benefits Than Your 401(K)

Heading Off Future Medical Expenses

The same consideration goes for healthcare costs in retirement. Having tax-free funds available to pay those costs rather than requiring a taxable 401(k) or IRA distribution can make a huge difference to retirees with limited funds.

To summarize, when prioritizing long-term savings while enrolled in HSA-eligible healthcare plans, I would strongly suggest that the order of dollars should go as follows:

Making The Most Of All Your Savings Options

1. Contribute enough to any workplace retirement plan to earn your maximum match.

2. Then max out your HSA. (For 2021, the maximum annual contribution, including employer contributions, is $3,600 for single coverage and $7,200 for family coverage, plus a $1,000 catch-up contribution for HSA holders age 55 and older.

3. Finally, go back and fund other retirement savings like a Roth IRA (if you’re eligible) or your workplace plan.

Remember that HSA contributions can be made via payroll deduction if your plan is through your employer, and contributions can be changed at any time.

Contributing To Your HSA Via Payroll Versus Lump Sum Deposits

You can also make contributions via lump sum through your HSA provider, although funds deposited that way do not save you the 7.65% FICA tax as they would when depositing via payroll.

The bottom line is that when deciding between HSA healthcare plans and other plans, there’s more to consider than just current healthcare costs and it often makes sense to max out your HSA.

An HSA can be an important part of your long-term retirement savings and have a big impact on your lifetime income tax bill. I know it’s a big part of mine, despite having relatively high healthcare costs for someone my age.

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