Do you know your limit? The IRS adjusts the contribution limits for 401(k)s and Health Savings Accounts (“HSA”) annually. Many employees aren’t taking full advantage of tax breaks they may be eligible for either by not participating or not adjusting their contribution amounts annually. Instead, employees are taking a “set it and forget it” approach.
What should you do? Determine if your employer offers a 401(k) Plan that you are eligible for. If so, does your employer provide a matching contribution to amounts you contribute to the Plan? Does your employer provide a profit sharing contribution? Are you contributing enough to receive the full matching contribution? According to Financial Engines, employees are leaving an estimated $24 billion in matching 401(k) contributions from employers on the table each year by not contributing enough to receive the full matching contribution from their employers.
Health Savings Account (HSA)
Are you or your family members enrolled in a qualified high deductible health plan? If so, you may be able to take advantage of the tax savings associated with a Health Savings Account. Contributions to your HSA account go into the account tax-free, grow tax-deferred and can be used to pay out-of-pocket qualified health expenses tax free. Unused funds and interest are carried over, without limit, from year to year.
What Should You Do?
Determine if you are eligible for an HSA. Determine if your employer will make contributions to your HSA. Remember, saving more money in an HSA while you’re young and healthy will allow you to build up a tax-free emergency fund if higher medical bills hit later.
According to Fidelity.com, a couple retiring this year would need $245,000, after Medicare, to cover out-of-pocket medical costs in retirement, not including nursing home care. The Fiscal Times reminds us that the default option for many HSAs is a money market or a savings account. That may be an adequate option if you’re going to use the money soon, but if you’re thinking of it as an additional retirement account, you’ll want to move it somewhere that offers investment options. The Fiscal Times also notes you’ll want to choose diversified funds with low fees or go for a target-date account timed to your retirement.
Remember – Always review your contribution amounts annually and the allowed IRS limits to ensure you are maximizing your benefits.
|Health Savings Account (HSA)||401(k)|
|Family Coverage||$6,750||Catch Up Contribution (Age 50+)||$6,000|
|Catch Up Contribution (Age 55+)||$1,000|