401K, Roth IRA, or HSA — Which Should You Invest in First?

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Here’s how to prioritize.


Key points

  • Roth IRAs and 401(k)s let you save for retirement, while HSAs let you save for medical expenses.
  • All of these accounts are useful in their own right, and together, they can set you up for success.

You may have the goal of being able to retire comfortably, and also, being able to tackle medical expenses with ease, whether they arise during your working years or later in life. The good news is that there’s a host of tax-advantaged accounts that can help you save for these goals.

First, there are 401(k)s, which are employer-sponsored retirement plans. Then there are IRAs, which don’t hinge on having a sponsoring employer. As long as you have earned income, you can put money into an IRA.

And then there are health savings accounts, or HSAs. These accounts let you sock money away for medical bills. But unlike flexible spending accounts (FSAs), HSAs let you carry funds forward from one year to another and invest money you don’t need to use right away.

You may be interested in contributing to all of these accounts — and wondering how to prioritize your contributions. Here’s a quick guide.

Get your matching dollars first

IRAs, 401(k)s, and HSAs are all tax-advantaged, and as such, the IRS sets a limit on how much you can contribute each year. But hitting those limits and still having money to save and invest left over is a good problem to have. For many people, the opposite holds true — they have limited funds to put into these accounts and want to maximize them.

If that’s the boat you’re in, and you’re all eligible for all three accounts, then it could pay to fund your 401(k) first. The reason? Many companies that sponsor 401(k) plans also match worker contributions to some degree. So it pays to claim that match, because it’s effectively free money.

So, let’s say you’re able to set aside $5,000 a year across all three accounts. If your employer will match 401(k) contributions in full up to $3,000, then your best bet is to put $3,000 into your 401(k) to get that benefit. From there, you can divide your remaining $2,000 between your Roth IRA and your HSA.

Which should take priority? That’s tricky, as both accounts serve an important purpose and offer their own benefits. In this situation, splitting your remaining funds between the two accounts equally is certainly a reasonable option.

Now you might assume you should prioritize your HSA if you’re fairly young, because while retirement might be many years away, a large medical bill could pop up at any time. And that’s good logic — assuming you plan to tap your HSA from year to year to cover healthcare costs.

But many people with HSAs don’t do that. Instead, what they do is pay for healthcare costs out of pocket or tap their savings accounts despite having money in an HSA, and then keep their HSAs invested. That way, they can benefit from tax-free growth. So if that’s your plan, too, then you don’t necessarily need to bump HSA contributions up over contributions to your Roth IRA.

Set yourself up for the future

Doing your best to fund a 401(k), Roth IRA, and HSA could put you in a great position to retire securely and have enough money as a senior to cover medical costs. While it generally pays to prioritize a 401(k) with a matching incentive, if yours doesn’t have that, it could pay to skip the 401(k) and try to get as close as possible to maxing out your Roth IRA and HSA.

Roth IRAs have a lot of benefits, like tax-free withdrawals in retirement. And they don’t force you to take mandatory withdrawals from your retirement savings later in life like 401(k)s do. So if your employer isn’t offering free money for your 401(k), you may want to solely save for retirement in a Roth IRA, all the while funding an HSA to cover your medical needs.

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