Which Comes First: Starting HSA or Maxing 401(k)?

…or to further extend the question, how about maxing out one’s IRA? What sequence should these events occur?

It’s Open Enrollment time for many of my clients, and with companies rolling out HSAs (Health Savings Accounts) with HDHPs (High Deductible Health Plans), there are more decisions to be made.

In general I am a fan of having a HDHP with an HSA for people who are generally healthy and don’t have family health issues to manage.

An HSA allows you to contribute pre-tax dollars to your account and accumulate money towards future health costs.

Whether or not you will have future health costs is not a question of if, it is a question of when. Having the funds available to pay for costs not covered by whatever coverage you have at that time will be invaluable to your financial security.

So, even though it seems like a slam dunk if 1) you are healthy and 2) your family doesn’t have legacy health issues, there are still things to consider.

Aside from the ¬†fact that it’s a radical departure from just paying your co-pay and deductible, a consideration needs to be made on when to start one.

If you are on track to max out your 401(k) every year (2011 = $16,500 for  >=50 years old), or close to it, then it makes that much more sense to start an HSA.

However, if you are nowhere near maxing it out, how do you decide when to start an HSA?

Or, if you have maxed out your 401(k), but have yet to start maxing out your IRA ( 2011= $5,000 for > 50 years old), what about then?

I group the HSA contributions along with the 401(k) and IRA contributions because they all 3 lead down the same path: Retirement Funds.

Granted, you can start using your HSA for health costs as you fund it, but it is not necessary to use your HSA to cover health costs: You can just let it continue to accumulate pre-tax funds (and accumulate tax – free earnings).

Obviously the choices here are pretty complex and call for thorough consideration of your overall financial goals and how far along you are with funding those goals.

But I do like this extra option now to save even more tax – advantaged money towards our retirement years.

(Full Disclosure: I am a Fee-Only Financial Planner. My website is here.)