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Should I Contribute To A 401k, Roth IRA, Or Health Savings Account?

Choosing a 401k, Roth IRA, or Health savings account for retirement investingThis is not a post for someone who has never invested in anything. If that’s you, it’s time to start. Pick something easy like your work 401k or a Roth IRA. This post is for those who are trying to build wealth while minimizing taxes and fees.It also assumes that you have access to more than one type of retirement account and are eligible to have a health savings account. If that’s you, today I want to examine whether it’s better to invest in a 401k, Roth IRA, or HSA.

While, ideally, we’d max out all those accounts ever year, realistically, many people have to choose where to put their money. All of that depends on your age, tax bracket, and how much you have to invest.


The 401k is maybe the easiest of the three. Generally, if you work for an employer who has a retirement plan, you’ll fill out enrollment forms, select which fund you want, and determine how much to contribute, up to $17,500 a year if you’re under age 50. People over 50 can add an additional $5500 per year in 2014.

Even if you are self employed, you can still contribute to a solo 401k or SEP IRA. With these plans, you can contribute 25% of your compensation, up to $52,000 this year. The solo 401k has the added benefit of allowing an additional $17,500 if under age 50 or $23,000 if older than 50. That’s a lot of money that can be socked away!

With a 401k or SEP IRA, your contributions are pre-tax, so the more you contribute, the less taxes you pay per year. The money grows, tax free, until you start taking distributions. If you wait until age 59.5, then you only have to pay regular income tax on what you withdraw. If you take money out before that age, you’ll get hit with the income tax plus a 10% penalty.

I love 401k’s because my tax rate is pretty high right now. When I retire, I don’t expect to be in such a high tax bracket, although you never can count on tax rates many years down the road.

Roth IRA

With a Roth IRA, money you contribute is after tax, but it grows tax free after it’s invested. You never have to pay taxes on the interest if you wait until age 59.5 to take withdrawals. I love Roths because you can withdraw contributions at any time without a penalty, just not the interest. I would not think of a Roth as an emergency fund, but money can be pulled out if things become dire. (No, needing a new bath remodel is not dire!)

You can only contribute to a Roth IRA if you income is below $191,000 for 2014. There are ways to do a backdoor Roth if your income is over that amount, but that’s for another post.

Roth IRA’s are a smart choice if you are in a very low tax bracket and believe it will be higher when you retire.  A Roth IRA is also a good way to get started if your employer does not offer a 401k.

Health Savings Accounts

I love health savings accounts because they are triple tax advantaged. You can contribute pre-tax, money grows tax free, and if you use it for qualified medical expenses, you never have to pay taxes on withdrawals. If you are healthy and don’t need HSA funds for medical expenses, they can become a regular retirement account at age 65. At age 65, HSA money is subject to income taxes if used for non-medical reasons. Under age 65, there is a 10% penalty plus income tax if the money is used for non-approved expenses.

To have a HSA, you have to have an eligible insurance plan, which has gotten harder to find since Obamacare. If you are lucky enough to have one, you can invest in a variety of options. I currently have mine invested in Vanguard funds and don’t plan on touching a penny until I retire. That way, I have a shot at covering medical costs as I get older without having to consider costly long term care insurance. If I do have a train wreck medical emergency, I could pull money out without penalty.

Which Is The Best Retirement Account?

I think any way you contribute is the right way as long as you understand what’s best for your long term strategy.

In my case, I have a solo 401k through Vanguard that has tons of low cost options. Your work 401 k might not have good fund choices or high fees. In that case, I’d contribute enough to get any match, then look elsewhere. If the funds are good and fees are low, I’d contribute as much as I could to the 401 k.

Then, I would highly consider maxing out a HSA every year IF you have one AND are investing in something with a decent return. Besides the great tax benefits now, you could potentially never have to pay tax on that money. If you are putting it into a savings account with a very low interest rate, I’d only deposit money to cover current medical expenses.

For me personally, the Roth will be the last thing I contribute to this year if at all. With our tax bracket, it just doesn’t make sense unless we have maxed out everything else. If you are in a low tax bracket and your 401k choices are poor, I’d max this one out every time. If you max it out and still have money to contribute, go back to the 401k option.

Since we are all in different situations, there is no best answer, but hopefully sharing my strategy will encourage you to figure out and maximize yours.

Which type of retirement account is best for you at this point? Are you taking advantage of all the tax savings you can?


Image: Freedigitalphotos.net/miles

About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.


  1. I admittedly know very little about HSA’s, but considering I qualify for medicaid, I have a feeling it’s not an option. The 401k is also dicey for me because I can only contribute when I’m working through the actor’s union, which is always inconsistent and unpredictable. The ROTH allows me to take SOME control over my financial future. Because I don’t have to rely on anyone but myself to be eligible and make sure the account gets funded, it’s the best option for me.

  2. We do a little bit of everything. Greg has a 401K and Roth IRA. I have a SEP IRA and ROTH IRA. We also have a health savings account.

  3. We’ve got IRA’s and SEP-IRA’s going but I have been curious about the HSA option. As you said they are hard to come by with health insurance plans. When the enrollment window opens up for 2015 I think I’ll need to spend some time trying to find one that can have the HSA.

    • If you can enroll in a HSA eligible plan, it’s worth it. Even if the premium is a bit more, check the tax savings. It might still be worthwhile.

  4. Great breakdown of the options Kim! I would generally agree and just really depends on your given situation in most cases. We’re actively doing all three. We both have SEPs, a Roth and have a HSA for the family. We’ve maxed out the latter two and hope to max the SEPs this year, but not certain if that’ll happen or not. Regardless if we do or not, it’ll be a sizable chunk of money. We’re doing all we can to maximize our tax savings – I want as little going to the IRS as possible. 🙂

  5. I have both a 401k and a Roth, but I do plan on opening either a solo 401k or SEP IRA in a month or two so I can maximize my savings.

  6. I don’t have the HSA option so I do the 401K and Roth. I’ve read that for me, someone with a pension, the Roth is a good choice for me, but I do like the tax deduction…though I should try to work on maxing both out.

  7. Great article. We have been maxing out 401k’s and Roths for six years, then any leftover goes in to other investments to bridge the gap between early retirement and 59. Once you max out and know you can do it then it is easier to just leave it alone and let it grow each year because it is built in to your family budget.

    • That’s so true. I only wish I’d done that from the beginning of my working career. I’d have gotten used to it and I’d be in a much better early retirement place at this point.

  8. I agree with your order (although we don’t qualify for an HSA so I can’t really comment much on those plans). The thing I like the best about the 401k is the fact that you can shelter so much of your money away from taxes and potentially get employer contributions along the way. The only thing to be conscious of is that you have more control over your IRA than you do your 401k. From the other site that I run I’ve heard a lot of horror stories about people NOT getting to take out loans if they need them or their money getting stuck for extended amounts of time before the 401k would let them have it.

    • Good point. I have a solo 401k, so I’m the employer and employee. It would be a real pain to not have that sort of control.

  9. MomofTwoPreciousGirls

    We are just getting back on track financially. For us the highest priority was funding our HSA to the max (my company gives $1600/year if we do simple tasks and then we have the rest contributed through payroll to the max). We also max out our Daycare FSA. Might as well get the max benefit I can with the crazy costs! Generally we don’t touch that money until the end of the year. We use some for Christmas and the rest to our savings. We now just began our 401k’s again and we are contributing the max to get company matches. Next goal will be our Roths.

    • I am really glad I don’t have daycare costs anymore, but the FSA is a great way to get a discount on that price. I was always amazed when people at my office with daycare costs did not enroll.

  10. We are actively contributing to our 401k and HSAs because of the tax savings. When we have extra, we add to our brokerage account rather than the Roth because I like the idea of using the tax losses or gains to help us with our taxes rather than staying within a retirement account. There are definitely nuances of some savings vehicles; however, I think as long as you make savings a focus, then you are on the right path and can’t go wrong.

    • I think that’s the great point. Pick something and stick with it. Any choice you make unless it’s money in a Ponzi scheme or something similar is generally way better than doing nothing at all.

  11. Great breakdown, Kim. And I agree that you can’t really go wrong with any of these options. I often encourage people to at least start with their 401k and invest enough to receive the Company match, assuming there is one. This is typically the easiest one to start and the least intimidating for those who feel overwhelmed by investing.

  12. It seems I am about to have a new employer and a great benefit package that will go with the new job. Retirement investment is part of that plan. I will come back and re-read your suggestions and information when I know the details of the plan.

  13. I think an HSA is probably the first thing you should max out. Wait, I mean second after you contribute as much as your employer is willing to match on your 401k! I just love the HSA because you can use it for medical expenses tax free (I can’t imagine paying with after-tax dollars anymore) and it essentially acts like an IRA. Best of both worlds.

  14. We do all three of these but didn’t get there all at once. If I had to put them in order of importance (or easy of funding) I’d do work retirement program first, especially if there is a company match. Then I’d expand into a Roth with any extra money I could find. I do the HSA last, after funding the other two.

  15. Great advice, and I especially appreciate your highlighting the insane benefits of an HSA. This is the best deal going, and the fact that you can carry the balance as long as you like, as opposed to flexible savings accounts that must be used up annually, is a fantastic feature of HSAs.

  16. 401K, HSA, and for the first time an IRA in 2014. Our retirement will rely heavily on real estate rental is the plan.

  17. I have an employer sponsored 401K plan, plus an IRA (which is roll-over from my previous employer). My job offers a HSA healthplan as well, but I don’t current subscribe to it. I am still on my dad’s insurance plan that way I do not have to meet my own deductible or pay out of pocket for my own low-deductible plan (the plan with an HSA at my office is a high-deductible plan). It costs him no more money than if I were’nt on the plan, he’d still have to have a family plan irregardless of if I’m on it or not to cover my brother and mom. I can take advantage of this for a couple more years, until I’m 26 and I plan to do so.

  18. I’m self employed, so I contribute to a solo 401k plan. I also contribute to an IRA as well. Since I am covered under my wife’s high deductible health plan, I also contribute to an HSA. I pay for anything out of pocket and am letting my contributions grow tax free until I am older.

  19. We aren’t doing a ton of retirement savings right now, simply because of our debt situation and because we’ve got retirement savings from previous jobs. Rick’s current job also has a nice plan that gets added to every quarter regardless of whether or not he contributes. The one good thing we have going for us right now is a solid retirement savings.

  20. My health insurance plan will not qualify for an HSA next year with the changes. I have maxed it out for 2014. I am self employed. I do not have a SEP but am interested in starting one if it will help. Are there tax benefits to erase the loss of the HSA deduction I could tap into? Any advice is appreciated.

    • Mke, I don’t know of any other savings vehicle that gives you the tax advantages of an HSA. You could technically never pay any tax on that money if you use it for health care. That’s sad to lose it, but I think the next best thing would be setting up a SEP or solo 401k. I chose the solo 401k because you can contribute not only the $17.5K for this year, but an additional 25% of your income up to $52K. I was not able to put in the max I could have, but being able to tax defer that much is a big help while our tax rates are as high as they will likely get. Rental property is another great tax advantage for us, but that’s a whole other ball game and I’m not sure what your situation or ultimate goals are. I’d start with the retirement plan and go from there. Good luck.

  21. Yes i like I’m self employed, so I contribute to a solo 401k plan. I also contribute to an IRA as well. Since I am covered under my wife’s high deductible health plan, I also contribute to an HSA.

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