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Is an HSA Better Than a 401K?

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Is an HSA Better Than a 401K?

Is an HSA better than a 401k? It could be. There are some unique tax advantages to both accounts but an HSA comes with one unique advantage that 401K’s or even IRA’s do not have: Withdrawals from HSA accounts could be completely tax FREE!

Many financial experts agree that if used correctly an HSA could be better than a 401k. The rational behind this thinking is that with a 401K you will have to pay taxes at some point but with an HSA, you might never have to pay taxes if you use your account wisely.

The nice thing about a 401k is that you can deposit funds into your retirement savings, get an immediate tax deduction and watch your money grow on a tax deferred basis. You won’t pay taxes on the money in your 401k until you actually withdraw your funds from the account – Hopefully at your retirement.

An HSA (Heath Savings Account) is similar to a 401k but in some cases even better. With an HSA you can deposit funds into your account, receive an immediate tax deduction and watch your money grow tax-deferred year after year, just like your 401k.

Now here is the beauty of an HSA and where the two accounts differ. As long as the HSA funds are used for “qualified” medical expenses, you will never pay taxes on the money when you withdraw them. Meaning, your HSA could actually be a TAX FREE ACCOUNT, whereas with a 401k or an even an IRA at some point Uncle Sam is waiting to get his share of taxes.

Later down the road most of us will have medical needs and expenses that we can pay with our HSA’s and even if we don’t by the grace of God, we will have plenty of other health items to pay for as we grow older.  Such as; long term care insurance or Medicare part B premiums, which are both qualified medical expenses.

Many employers and employees are confused about how HSA plans really work, but with the ever increasing cost of traditional group health plans, HSA’s are growing more popular.  To learn more about how HSA’s work, click here to read about the advantages of an HSA Account.