Hiding in plain sight in your benefit enrollment packet is an ultimate financial account called a health savings account.
Here’s a good rule of thumb on how to coordinate your 401(k) and H.S.A. contributions.
1. If your employer is offering a 401(k) match, you should contribute up to the match amount. For example, say your employer will offer you a 3% match. This means is that they will contribute 3% of your salary towards your 401(k), if you also contribute 3%. Example: $50,000 salary Employer offering a 3% company match
You contribute $1,500 to 401(k) (3%) Employer contributes $1,500 to 401(k) (3%)
By contributing 3% on your own, you have an opportunity to receive free money from your employer. In this case, they will give you $1,500 of free money.
You have the option to contribute more than 3%, but before you do that we would recommend you turn to your health savings account.
2. If you are given the ability to contribute to an H.S.A., you should contribute the maximum to this account prior to making any further 401(k) contributions. 2019 H.S.A. Contribution Limits Single coverage: $3,500. Family coverage: $7,000.
*If you are age 55 or older, you can contribute an additional $1,000 per year.
The reason this is optimal is because your H.S.A. is more flexible than your 401(k). You can access the money before retirement age, the money can be invested just like your 401(k), and it is treated the same way in retirement if you use it for something other than qualified medical expenses.
3. After you have met 401k match, and maxed your H.S.A., you can go back to your 401(k) and contribute as much as you would like. In summary, a good rule of thumb:
1. Contribute up to your 401(k) employer match amount 2. Max your H.S.A. 3. Contribute additional money to your 401(k)