401k vs HSA

[Runrooster]

I started a new job recently and am able to contribute to my 401k immediately. I have $x (less than max allowed) salary I can put towards that.

Or, I can put $2k towards my HSA through payroll deduction, saving $200 of FICA. Then I can put $x-2 towards my 401k.

Back to scenario 1, I can still contribute $2k towards my HSA, but lose the FICA deduction by not doing it through payroll deduction.

My thought: saving 7.65% now is more valuable than putting that extra $2k in my 401k, which I maxed out last year and expect to max out in the future. Am I thinking about it wrong?

ETA: the only reason I didn’t max this year is previous job didn’t let me in the plan right away. Also I’m getting full match at either $x or $x-2.

[Dave1442397]

Don't forget the HSA money is also tax-free when withdrawn for medical expenses, and if you leave it invested it grows just like your 401(k).

I always max out the HSA account first, and all but $1000 of the balance is invested in VTSAX.

[lifeisshort123]

I’m a bit confused.  Does your employer limit the HSA amount? Or, are they providing some funds towards your HSA? The federal limits are higher than that.

What is your age/medical use case?

[Runrooster]

I’m a bit confused.  Does your employer limit the HSA amount? Or, are they providing some funds towards your HSA? The federal limits are higher than that.

What is your age/medical use case?

Yeah the limit is 3650, but employer is putting in some, and I put in some in a prior prior job. Plus rounding for the sake of illustration.

[AnotherEngineer]

HSA first after whatever meets the 401k match, if applicable. It is the Ultimate Savings Account for taxes and medical costs are inevitable.

[slappy]

HSA

[Gin1984]

Agreed, HSA after you get your 401k match is normally better even if it means not maxing out your 401k.

[Runrooster]

I’m not sure you folks read the post. HSA will get funded either way. I can do it outside payroll deduction.

[mrteacher]

Do you only save the FICA tax on HSA contributions if it is funded through payroll deduction?

If I self-fund after the money hits my checking account, can I be reimbursed for FICA or no?

[dandarc]

So you have money sitting around, and not enough time / earnings coming to max both the HSA and the 401K.

I don't think the advice changes - you do 401K up to any match, then the HSA through the employer to maximize tax savings with that, then go to either traditional IRA if it is deductible for you or 401K to the extent possible. Or Roth if that makes more sense than traditional for your specific situation.

Since you have cash savings, you can go so far as zeroing your paycheck (well as close to this as your employer allows anyway) to get as much into your HSA & 401K as possible before the end of the year and spend the savings on food and whatnot.

@mrteacher - as far as I know, to save FICA you would have to fund the HSA through payroll deduction.

[HPstache]

Make sure your HSA has decent investment options, or that you are able to use the HSA bank that you prefer.  I personally don't use my HSA as an investment vehicle, prefer to put into it what I think I'll need for the year use it for my medical expenses as intended even though that is suboptimal.

[Runrooster]

Do you only save the FICA tax on HSA contributions if it is funded through payroll deduction?

If I self-fund after the money hits my checking account, can I be reimbursed for FICA or no?

Dandarc replied but I will also say that I paid 4 years of HSA out of my pocket so if there’s a way to get FICA back, I didn’t find it.

Dandarc, my paycheck is zero, so I’m confused that they are taking out small amount of state taxes.
I spent two years with my entire paycheck going to Roth 401k, self funding the HSA (no payroll deduction set up) and IRA so it was weird to get actual money last year.

[Gin1984]

I’m not sure you folks read the post. HSA will get funded either way. I can do it outside payroll deduction.

Don't do that, you lose the FICA deduction if you do.

[seattlecyclone]

I’m not sure you folks read the post. HSA will get funded either way. I can do it outside payroll deduction.

Don't do that, you lose the FICA deduction if you do.

True, but it sounds like in this case there's not enough time left in the year to fill up both the HSA and 401(k) through payroll deductions. It's a trade-off between putting $2,000 more in a tax shelter (by putting all the paycheck into the 401(k) and contributing to the HSA from outside funds) or contributing $2,000 less to the 401(k) and saving $153 on FICA taxes because the HSA came from the paycheck. If your normal tax bracket is above 7.65% you'll pay less tax this year by contributing to the HSA from outside funds, with the trade-off of having more tax to pay during retirement from your slightly higher 401(k) balance. The other other trade-off is if you pay more FICA you'll get more money from social security when you get old. In the grand scheme of things it probably doesn't matter much either way.

[MDM]

The 2022 HSA can be funded through Apr. 15, 2023, but the 2022 401k can be funded only in 2022. 

Often, HSA payroll deduction is close to break-even when it comes to FICA taxes, so putting more into tax-advantaged accounts is probably the overall winner.

[Runrooster]

Thanks MDM, that is precisely the kind of analysis I was hoping for.

I spent some time trying to figure out which bend point I will be in because the AIME is not listed anywhere. And of course it will depend on my future earnings. I think I’ll hit the second bend point right around NRA.

It sounds like it’s a wash overall, but best bet to put in as much as possible to 401k.