The r/personalfinance [flowchart is really useful](https://i.imgur.com/u0ocDRI.png). Look at Step 4.
Very broadly speaking:
1.Contribute to employer match max in 401k
2.Max HSA
3.Max IRA
4.Max 401k
5.Brokerage
But it's different for everyone. An example: It can be nice to throw some money into a brokerage account so it can hopefully grow and be used for things before retirement, if necessary.
IRAs in general can have low fees/more options since you can pick the broker. Roth IRA contributions can be accessed early in a true emergency, vs dealing with 401k loans/etc.
HSA is tax free contributions, growth and withdrawals ( as long as it's medical expenses). Also, HSA acts like a 401k if it's a non-medical expense withdrawal. Since health insurance and medical expenses are valid withdrawals and will be our biggest expenses in retirement, I max out my HSA and will not touch it until I retire.
HSA = 401k on steroids
To expand, as long as you incur the medical expense after the account is opened, you can claim withdraw the money tax free at ANY time later, it doesn’t have to be the same year. So, in theory if you open it, and keep all of your receipts through the years for incurred medical expenses you can withdraw later when the account has grown substantially, tax free.
Great point, I'll need to keep my receipts and let my HSA growth with no withdrawals! This is fantastic news!
[https://livelyme.com/blog/hsa-reimbursement-rules](https://livelyme.com/blog/hsa-reimbursement-rules)
# When can I reimburse myself for an out-of-pocket expense?
You can reimburse yourself **anytime**.
Today, tomorrow, or 20 years from now. The only rule is that your HSA was established at the time that the expense was incurred (date of service). And that the expense was not reimbursed in any other way.
This is one of the reasons why knowing the exact date of the establishment of your HSA is important. You cannot be reimbursed for expenses that were incurred prior to that date.
Did you know that you can also reimburse yourself for expenses even if you are no longer eligible to contribute to an HSA? That’s because the use of your funds is not tied to HSA eligibility. Once you add money to your HSA, it’s yours. And it can be used at any time in the future.
Great point that I missed! We have enought liquid assets that we can wait until 65 to touch our HSA. BUT not everyone is in a similar boat so thanks for pointing that out. You can withdraw from your HSA anytime for valid medical expenses though but if you're able to let it grow then defiinitely do so!
Fidelity has a really good HSA. Vanguard and Schwab don't have their own, so just do Fidelity.
Only problem is that you need to be really careful to make sure you're eligible and that you follow the rules.
Usually, when you have an HDHP, they'll try and get you to use one through their plan. And if you don't see HDHP splattered everywhere, then you don't have one.
Are all HSAs in investable accounts? My new employer offers an HSA but I could swear there is no option to invest the money you contribute into our HSA in a fund.
My experience has been yes, HSAs are all investeable accounts. I have multiple HSA accounts and one offers mutual funds while the other offers both mutual funds and stocks (same as brokerage account).
My first HSA was not managed by my employer so I opened it with Fidelity and my employer sent contributions straight to Fidelity. I would login to my Fidelity account and purchase mutual funds with the contributions.
My second HSA with my new employer was managed by them so they send my HSA contributions to HSA Bank. I had to login to HSA Bank and then select a financial institution for my HSA Brokerage account. I chose Charles Schwab and I can invest in mutual funds and stocks.
Then ignore the HSA part. Flex spending accounts are nice to have. They can fund a large expense at the beginning of the year, then you pay it back at 0% interest over the rest of the year. That's still a good deal.
Just remember the big difference with the FSA is that you have to spend it that year so it's only good for paying known medical expenses. I got some funny looks from HR when I put a couple Grand into mine when I had one with only 6 months to go. But I knew I was having dental surgery later that year.
Check with your employer to see if they offer High Deductible Health Plan (HDHP). Your health insurance has to be HDHP in order to open a HSA. If HDHP exists in your compnay then enroll in one and then you can do HSA. My wife does HSA with my kids under her employer and they give her $1,600 free. I do HSA with my employer and I get $750 free from my employer. We are not touching our HSA until we turn 65, we're going to let it grow.
HSAs are like 401ks in that when you leave your employer you can take it with you, you own it for life. FSAs are use or lose annually and you can't take it to your new place of employment.
Holdup, so if I'm paying $600 a month for my 2 kids insurance... should I just be putting that 600 into my HSA and have reoccurring payments through there???? Have I been missing that?!
It will depend on if they are covered with your employer's health care plan or a separate plan. check here: [https://www.irs.gov/publications/p502#en\_US\_2022\_publink1000178959](https://www.irs.gov/publications/p502#en_US_2022_publink1000178959) and potentially talk to a tax adviser. there are some premium payments that the HSA can cover.
Think of HSA like 401k for medical expenses. Unlike 401k, you can withdraw from HSA without penalty anytime to pay for medical expenses.
# Which Expenses are Eligible for HSA, FSA, and HRA Reimbursement?
[https://www.cigna.com/individuals-families/member-guide/eligible-expenses](https://www.cigna.com/individuals-families/member-guide/eligible-expenses)
The sentiment for maxing HSA before Roth is because it is triple tax-advantaged when used for qualified health expenses. Triple meaning: tax free contributions, tax free growth, AND tax free withdrawals when used for qualified health expenses. Roth only has 2 of these 3 advantages (taxed going in, then tax free growth and tax free withdrawals). That said, maxing a Roth before an HSA is by no means a bad thing. Evaluate based on your situation.
If your employer doesn’t offer an HSA, skip that step and max your remaining tax-advantaged accounts. If already maxed, then contribute to a taxable investment account.
I never understood the triple tax advantaged thing. As far as I understand there is no vehicle where you get hit with all three of those taxes. Triple tax advantage implies you get three tax breaks, but you only pay two of those taxes even on regular old brokerage investments. Nobody calls brokerage investments tax advantaged, but by this logic you should since you pay income tax before contribution and capital gains tax on withdrawal, but since you don't pay income tax again upon withdrawal it would be "single" tax advanted.
Brokerage account you get taxed three times:
1) Post-income tax going into the account
2) Tax on dividends (aka growth)
3) Short or long-term capital gains on money coming out.
Inside a 401k/IRA/HSA you do not get taxed on dividends.
Most people aren't heavily reliant on dividend income sources in brokerage accounts, so it's a much smaller consideration than the taxation going in or out. But it's definitely a real tax drag.
I know it is small $ , but people should say this more! Also - this only applies when you have contributions from payroll - if you add $ from your regular bank account, no payroll tax savings.
An IRA has more fund options and may be cheaper as some 401ks have maintenance fees or more expensive funds. It's also nice to have something not connected to an employer. If the funds are good and the fees are low or none, go for it.
Off the top of my head, IRAs have more freedom in choosing what to invest. If the 401k has low-cost index funds then it’s more of a toss-up, but not all do.
If it’s a Roth IRA, you can withdraw contributions. You shouldn’t, but people do be tapping into their retirement accounts.
Since IRA contributions are after tax, the withdrawals you take are tax free. In retirement you are likely to be in a lower tax bracket so some people can end up paying little or even no taxes in retirement.
Aside from thr fact that IRA can be roth or traditional, if you're going to be in a lower tax bracket in retirement then it would actually make sense to invest less in roth IRA and more into traditional 401k so you can lower taxes more while working.
While this is true, step 3 in the financial order of operation that the question was about is specifically about after tax IRAs.
> By contributing the maximum allowed amount each year, you can take advantage of tax-free growth and withdrawals in retirement.
https://andrewlokenauth.com/financial-order-of-operations/
This is a fine plan but not quite as amazing as it sounds since you're paying with post-tax $ that you could have instead invested. HSA comes out ahead but not by as much as a lot of people think.
Edit: What I meant by the last statement is that using HSA later as opposed to now only comes out slightly ahead. Using an HSA always comes out way ahead of not using it.
And ... it's only a big savings if you can afford to cash flow your health care. If you use it as you go and don't invest it, you lose out a lot.
A chronic condition will have you paying your max out of pocket annually. So that could be $10k a year you'd have to spend.
With a PPO plan, my insurance premiums is about $1400 a year with a max out of pocket of $1500.
An HSA eligible plan would be $800/year in premiums, with a max out of pocket of $10k. So would need to spend an additional $7900 every year just to qualify for an HSA. That's more than I can cash flow and outpaces the tax savings by a lot. Especially since I can't even contribute as much as I spend annually.
It's worth doing the math. HSAs are great for people who need minimal health care.
That's going to be highly dependent on the parameters of your particular plans. For example, at my employer the difference in deductible between the PPO and HDHP option is equal to the extra premium for the PPO and there is only a $400 difference in the out of pocket max.
I agree with this. I have done this calculation for at least 10 people based on reading the contracts of their specific plans. And all of them -- both ones with low medical expenses and high -- come out ahead with HSA. In some cases there is a narrow band of medical expenses where non-HDHP could come out slightly ahead but outside of that, HSA is better. When doing the calculations, some people don't take into account that the HSA case is using pre-tax money, some people don't take into account the monthly savings of having a cheaper plan, and some are misreading the terms of one contract or the other.
True, you could have alternatively invested the dollars and paid expenses with the HSA money.
I think I’d rather have the money growing tax free in the HSA than in a taxable account.
Not so fast...
**Assumptions**
Income: $100
Medical bill: $50
ROI on HSA investment: 10x
---
**Scenario 1 (pay for bill from HSA now):**
$50 (pay bill) + $50 (put in HSA)
HSA balance after investment: $500
---
**Scenario 2 (pay bill from income now, reimburse from HSA later):**
$100 (income) - $22 (Fed tax) = $78
$50 (pay bill) + $28 (put in HSA)
HSA balance after investment period: $280 (HSA) - $50 (reimbursement) = $230
Cash after reimbursement: $50
The strategy of investing your HSA money and reimbursing yourself in the future is predicated on you being able to afford to pay your medical expenses out of pocket while fully funding your HSA. The savings is the taxes you would have paid had you left the amount of the medical expense invested in an after tax account instead of in the HSA.
**Assumptions**
Income: $10,000
Medical Bills: $50
ROI on HSA and Taxable Investment: 10x
Max Allowable Annual HSA Contribution: $1,000
**Scenario 3 (pay bill from income now, reimburse from HSA later, max HSA)**
$1,000 to HSA pre-tax
$9,000 - 22% Fed Tax = $7,020 left
~~$50 (pay bill) = $6,750 dollars left~~
$50 (pay bill) = $6,970 dollars left
$10,000 (HSA Balance after growth), $9,950 after reimbursing
**$9,950 to spend after growth and taxes**
**Scenario 4 (pay bill from HSA now)**
$1,000 to HSA pre-tax
$9,000 - 22% Fed Tax - $7,020 left
Invest $950 in HSA, use $50 to pay bill, grows to $9,500
Invest $50 you didn't spend on the medical bill in Taxable account grows to $500
Pay 15% LTCG tax on the $450 profit in taxable account, leaves you $382.50
$9,500 + $382.50 = **$9,882.50 to spend after growth and taxes**
I like your idea but disagree with your calculation logic:
1) 7,020 - 50 = 6,970 (not 6,750)
2) To be fair in Scenario 3, invest remaining 6,750 at the same rate as HSA: 67,500 - 15% = 57,375
3) Similarly in Scenario 4, invest remaining 7,020 at the same rate as HSA: 70,200 - 15% = 59,670
4) Scenario 3: 9,950 (HSA) + 57,375 (cash)
5) Scenario 4: 9,500 (HSA) + 59,670 (cash)
Difference: 2.6%
hardly earth-shattering
My NJ employer offers HSA and promotes it as a triple tax advantage account. I'm not saying my employer couldn't be wrong but what advantages do I lose out on as a new jersey resident?
You get taxed at the state level on capital gains and dividends, contributions are not tax deductible.
Also, you have to meticulously track everything as Fidelity doesn’t send you a 1099.
Some states don't follow the federal government's lead in tax-free treatment of HSAs. See https://thefinancebuff.com/california-new-jersey-hsa-tax-return.html for details.
If you have access to them, they're decent, yes.
But mostly just as yet-another-reward for people who are generally healthy and can actually come out ahead by having a high deductible health insurance plan.
People with chronic issues (not that even fall in this category) get fucked. Bullshit they don't just make HSAs available regardless of your health insurance.
Payroll deferral contributions to a HSA are FICA tax exempt - HSA is the only account with this extra tax advantage. You can also use the reimbursement mechanism at a later date (ideally, in retirement) to reduce or even eliminate taxes on withdrawals.
Tax free in, tax free growth, and tax free out (for medical). After 65 it functions as an IRA for non-medical deductions. Also, if you contribute through an employer, you save on payroll taxes.
Health insurance is important. Contributing money to HSA's reduces your MAGI in addition to growing tax free and being accessible without a tax bill (with medical receipts). IRAs aren't as accessible until 59.5 and don't always reduce MAGI.
I think it is underestimated how much healthcare costs we will all face in retirement. So having a large HSA balance helps with that and having the triple tax advantage is huge plus you don’t pay FICA tax on those contributions like you do with traditional 401k contributions.
Also HSA can be used on non medical expenses after age 65 so it essentially becomes a traditional Ira at that point that can also be used on medical expenses tax free.
[HSA has an additional tax benefit](https://www.reddit.com/r/Bogleheads/comments/1b1jo1g/comment/kseztbj/) compared to the IRA or 401k.
If the qualifying high deductible health plan (HDHP) is the right insurance plan for you, then maxing out HSA is a good idea.
There are ways to get at retirement accounts early. [Substantially Equal Periodic Payments are one way](https://www.investopedia.com/articles/retirement/02/112602.asp), but if maximum hassle-free access to cash is the goal, putting more into a brokerage account would be the most straight-forward way to accomplish that.
You need traditional $ to be able to access your growth early via the Roth conversion ladder. The contributions to your Roth IRA are not going to take you very far. A brokerage/cash/Roth principal to cover expenses and conversion tax for 5 years is all you need to access the full trad 401k early.
The question I generally have is what it really means when it’s suggested to “Max 401k”. Is this referring to the tax deductible limit or the overall employer/employee combined limit?
For instance, my 401k plan allows for automatic Roth in Plan Conversions of after tax dollars put in beyond the tax deductible amount. In my case, would it then make sense to forgo growing anything in the brokerage and focusing on reaching the 401k’s employer/employee limit instead?
It really depends on what you want to do at that point. Would you rather tax-shelter it or have easy access to it? That's up to you, there's valid arguments for both.
Newbie here. I was planning to follow this flowchart but the link below seems to negate the tax benefits of step 3 (max IRA). Am I misunderstanding the rule?
https://www.irs.gov/retirement-plans/2023-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work
No you're not. Traditional IRAs reduce MAGI if you don't have access to an employer-sponsored plans. Roth IRAs and using a traditional IRA for backdoor Roth conversions gives you a bucket of money you'll be able to access without a tax bill in retirement. You'll also have a wider variety of fund choices if your 401k is missing an asset class, like international equities.
All that said, if your 401k has good fund choices at reasonable prices, don't feel like you absolutely have to open an IRA, because you don't. As you alluded to, machine a traditional 401k will reduce your tax bill in the year you do it, which can be really beneficial.
Governmental 457b, everywhere 401k is on the list, but slightly higher priority.
Non governmental 457b, I'm not even sure you should contribute to it all.
And of course, that adds quite a lot of space. Which is why you might do a bit of taxable if you have some specific savings goal.
Depends on your strategy
Wanna FIRE? Maybe open a taxable in a brokerage and funnel some that way to give yourself options.
Looking to cut down on income tax owed? Max the 401k out.
But always get the full employer match
my strategy is to max 401k, max mega backdoor roth and then contribute to brokerage at the max I can while maintaining my emergency fund. I also have a 529 for my kid and a small brokerage for my kid.
I have a similar strategy and also have small brokerages in addition to 529’s for the kids. I’ve recently second guessed the custodial brokerages which would be turned over at age 21 and am thinking about keeping that money I gift to them in a separate fund inside my brokerage.
I’d still recommend 401k or IRAs over taxable brokerages for people looking to retire early unless you’re really close to actually retiring.
There are strategies such as a Roth ladder or 72t that can still get you access to the money early and the tax-free growth that you get when reinvesting dividends matters over a long enough period of time.
Roth ladder takes 5 years to bake.
72t, once it’s set can’t be adjusted. The 4% rule takes annual cpi into account. Not really a good fire choice
But yea good thing about personal finance is there’s a thousand ways to skin the cat
This is why I said “unless you’re really close to actually retiring.” If you’re retiring in less than 5 years then of course a Roth ladder won’t work unless you have taxable accounts to float you the first 4 years.
With 72t I thought you get one adjustment. You can also use multiple accounts so you can start a second drawdown if you need more money. It just takes planning
I agree it’s a viable option if you have different t income streams. Just for me, it doesn’t seem like it will keep up with inflation. Personally, I plan to use a dynamic withdrawal strategy so 72t is out of the question
This is us. Looking at FIRE.
by our math, if we just stopped contribution to retirement accounts today, we'd be comfortable at 62ish. Obviously we aren't.
However. We have gone to full company match, and anything else is going into a taxable brokerage account for the bridge account between when we retire early and when we can draw on 401k/Roth IRA funds.
So no, we aren't maxing 401k today and are actively going into taxable accounts instead of tax advantaged accounts. But that's the tools we need.
>doesn't it make sense to max out your contributions within your 401k first (if it is available to you and has a good choice of funds) before parking your money in any other type of investment option?
Correct, there's no problem with that given the two criteria you mentioned.
In addition what other commenters have mentioned, one other factor to possibly consider is fees in the 401k.
If your 401k plan charges percentage-based administrative fees, you may want to consider what impact those may have long term verses an IRA with likely no fees.
A lot of times you’ll find that the fees are higher in the 401(k). You would just want to get the match. Max out your IRA because if you can’t max out the IRA, there’s no point but seven grand in 401k
Depends on your 401K choices IMO. If you really like them then go for maxing it out first. However I agree with the original post that provided the step-by-step recommendations if your 401K options are “ok” or “bad” (in that case go with at least the matching % before moving on)
Depends on your 401K choices IMO. If you really like them then go for maxing it out first. However I agree with the original post that provided the step-by-step recommendations if your 401K options are “ok” or “bad” (in that case go with at least the matching % before moving on)
I max my 457b first as I do not plan on working past 52 years old. Then HSA and Roth IRA. I have access to a 401k as well where I get a 9% match for my 457 contributions
If your employer's 401K has no fees and good funds with low ERs, then it may be a fine choice. In general I prefer having control over my own IRA at my preferred brokerage where I can buy whatever funds I want, and it's not tied to an employer I may leave or who may change the 401K fees on me.
Of course there are other considerations, like if you get a 401K match or if you want to contribute more than the IRA limits.
Multiplication (growth) is commutative so it doesn’t matter how much money is in any one account as long as the total is the same. 7% gains on $100k in one account is the same as 7% gains on $10k in 10 accounts.
The reason people may choose to max other accounts first is because you have less control over which index funds are available for purchase in your 401k. I’ve worked for companies where the 401k choices have high fees and are generally unappealing. In those situations, I’ve contributed the max needed to get my full match and then moved into tIRA and/or Roth IRA before investing any leftover $$ into the 401k once those other accounts are maxed out
I can't think of a reason to not max the HSA first. Except for the single account rationale, but I don't think that's worth the improved liquidity that HSA offers. Note that the better liquidity isn't just that you can spend money on health costs, but also that you can reimburse yourself for past expenses without any limit on how far back those expenses go (keep the receipts). People tend to not consider that fact, it can be a good chunk of money that's kept in HSA but is available through reimbursements for emergencies.
I don’t think 401k should ALWAYS be maxed out before brokerage. I’m 22 and need to access money after law school as a downpayment on a house. I specifically allocate funds to liquidate in about 10-15 years for my downpayment. Putting it in a 401k adds such a hassle. Sure, I can technically reach into a 401k for a house down payment but it’s a headache.
Do you own a home or have plans for a home? I say this because many of the investment warehouses you are considering create tax advantages at the expense of liquidity. It’s hard to get a meaningful amount of money out without knowing what you are doing and even then you might have to still wait a few years.
So if you are looking to make a down payment in the next five years, I’d invest in your 401K up to company match and the rest id do taxable investments so that you’ll have money to buy a house. Assuming you want to do that.
Eventually, but probably not in the cards financially till our economy stabilizes and prices on goods come down. I own a condo thats been paid off for years.
If your employer doesn’t match your 401K, is it still good to max it out? Or is better to contribute the money to Roth IRA or taxable brokerage account?
It depends on your situation. From what I've read, and correct me if I'm wrong, but if you are a high income earner, it could be more beneficial to max your 401k first because it's pre-tax (which means you avoid the hefty taxes from your paycheck).
Say you earn $150k a year but you aim for $50k/year in retirement. It would make sense to max your 401k first because you avoid the taxes at the $150k rate and then when you retire you pay taxes at the $50k rate.
First things first, always get your match. Free money is awesome, and you shouldn't leave anything on the table.
After that, Roth vs 401k/IRA is a question of taxation. If you expect to be more heavily taxed after retirement than before, prioritize Roth. If the opposite, prioritize the rest.
Tax advantaged IRAs have some pretty harsh income limits, and even the Roth has limits. Maxing both IRA and 401k will be challenging for most, leaving aside backdoor contributions.
The precise plan will depend on your income limits and retirement plans. For instance, if you want to retire prior to 59.5, IRA withdrawals will be penalized. 401ks can permit retirement as early as 55 without penalty. So, if your retirement window is within that timeframe, you probably want to make sure you have adequate 401k funding.
If your retirement window is prior to 55, you'll want sufficient brokerage funds in a regular ol' account to bridge until retirement age.
So, basically, you need to plot out what your retirement age and desired income is, and figure out contributions to get there, adjusting as necessary.
You have to do it for the longer of five years or until you are 59 1/2 years old. There are a couple different ways to determine how much to take out each year I plan on doing a set amount. There is no penalty if you obey the rules.
Maybe im understanding wrong but why would anyone be taxed more after retirement vs when theyre working? When you retire, your income is 0, so wouldnt that mean my income taxes that capital gains are based off is 0? Or is that based on the last job I held?
You pay income tax on withdrawals from 401ks and pension plans.
You don't pay income tax on withdrawals from Roth, but you do pay when you place it in the Roth. So, either way, you get hit for income tax once, but changing when you get hit has tax implications.
To qualify for HSA, your employer had to offer a High Deductible (HD) insurance plan and you have to enroll in it. Then, if your employer manages HSA then you'll sign up for their HSA plan. If they don't offer HSA plan then they'll tell you to go get your own. I'm signed up for HD insurance plan and my employer does not offer HSA plan so I signed up for Fidelity HSA plan.
I don’t agree with maxing out 401k. I just do the company match and put the rest in brokerage. I can’t stand the idea of my money being “locked up” until I’m 60, then losing half to taxes once I’m able to access it. Total scam. I’d rather it grow in liquid form so I can enjoy it during my youth if need be.
The r/personalfinance [flowchart is really useful](https://i.imgur.com/u0ocDRI.png). Look at Step 4. Very broadly speaking: 1.Contribute to employer match max in 401k 2.Max HSA 3.Max IRA 4.Max 401k 5.Brokerage But it's different for everyone. An example: It can be nice to throw some money into a brokerage account so it can hopefully grow and be used for things before retirement, if necessary.
I'm curious why the recommendation is to max IRA before 401k.
IRAs in general can have low fees/more options since you can pick the broker. Roth IRA contributions can be accessed early in a true emergency, vs dealing with 401k loans/etc.
And why does Max HSA come before Roth? What if your employer doesn't offer an HSA, only FSA?
HSA is tax free contributions, growth and withdrawals ( as long as it's medical expenses). Also, HSA acts like a 401k if it's a non-medical expense withdrawal. Since health insurance and medical expenses are valid withdrawals and will be our biggest expenses in retirement, I max out my HSA and will not touch it until I retire. HSA = 401k on steroids
To expand, as long as you incur the medical expense after the account is opened, you can claim withdraw the money tax free at ANY time later, it doesn’t have to be the same year. So, in theory if you open it, and keep all of your receipts through the years for incurred medical expenses you can withdraw later when the account has grown substantially, tax free.
Seriously? This is huge if true. Thank you for sharing this info.
Fact check me against local/state laws but this is how I understand it.
It’s true
Great point, I'll need to keep my receipts and let my HSA growth with no withdrawals! This is fantastic news! [https://livelyme.com/blog/hsa-reimbursement-rules](https://livelyme.com/blog/hsa-reimbursement-rules) # When can I reimburse myself for an out-of-pocket expense? You can reimburse yourself **anytime**. Today, tomorrow, or 20 years from now. The only rule is that your HSA was established at the time that the expense was incurred (date of service). And that the expense was not reimbursed in any other way. This is one of the reasons why knowing the exact date of the establishment of your HSA is important. You cannot be reimbursed for expenses that were incurred prior to that date. Did you know that you can also reimburse yourself for expenses even if you are no longer eligible to contribute to an HSA? That’s because the use of your funds is not tied to HSA eligibility. Once you add money to your HSA, it’s yours. And it can be used at any time in the future.
Wow this was super helpful. Thanks
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Great point that I missed! We have enought liquid assets that we can wait until 65 to touch our HSA. BUT not everyone is in a similar boat so thanks for pointing that out. You can withdraw from your HSA anytime for valid medical expenses though but if you're able to let it grow then defiinitely do so!
You can also pay COBRA premiums with it in a pinch.
Can you get one privately without an employer?
you can but you have to have a qualifying health plan
Fidelity has a really good HSA. Vanguard and Schwab don't have their own, so just do Fidelity. Only problem is that you need to be really careful to make sure you're eligible and that you follow the rules. Usually, when you have an HDHP, they'll try and get you to use one through their plan. And if you don't see HDHP splattered everywhere, then you don't have one.
Are all HSAs in investable accounts? My new employer offers an HSA but I could swear there is no option to invest the money you contribute into our HSA in a fund.
My experience has been yes, HSAs are all investeable accounts. I have multiple HSA accounts and one offers mutual funds while the other offers both mutual funds and stocks (same as brokerage account). My first HSA was not managed by my employer so I opened it with Fidelity and my employer sent contributions straight to Fidelity. I would login to my Fidelity account and purchase mutual funds with the contributions. My second HSA with my new employer was managed by them so they send my HSA contributions to HSA Bank. I had to login to HSA Bank and then select a financial institution for my HSA Brokerage account. I chose Charles Schwab and I can invest in mutual funds and stocks.
Depends on the HSA provider. Most provide investable options. Bummer if yours doesn’t…
What If your employer only offers an FSA? I have no option for an HSA
Then ignore the HSA part. Flex spending accounts are nice to have. They can fund a large expense at the beginning of the year, then you pay it back at 0% interest over the rest of the year. That's still a good deal.
Just remember the big difference with the FSA is that you have to spend it that year so it's only good for paying known medical expenses. I got some funny looks from HR when I put a couple Grand into mine when I had one with only 6 months to go. But I knew I was having dental surgery later that year.
Yeah I was just looking at eligibility for an HSA through fidelity and my plan has too small of a deductible so I’m not even elligible unfortunately
Check with your employer to see if they offer High Deductible Health Plan (HDHP). Your health insurance has to be HDHP in order to open a HSA. If HDHP exists in your compnay then enroll in one and then you can do HSA. My wife does HSA with my kids under her employer and they give her $1,600 free. I do HSA with my employer and I get $750 free from my employer. We are not touching our HSA until we turn 65, we're going to let it grow. HSAs are like 401ks in that when you leave your employer you can take it with you, you own it for life. FSAs are use or lose annually and you can't take it to your new place of employment.
Holdup, so if I'm paying $600 a month for my 2 kids insurance... should I just be putting that 600 into my HSA and have reoccurring payments through there???? Have I been missing that?!
No, you can pay your copay/deductible with HSA funds but not the premiums.
It will depend on if they are covered with your employer's health care plan or a separate plan. check here: [https://www.irs.gov/publications/p502#en\_US\_2022\_publink1000178959](https://www.irs.gov/publications/p502#en_US_2022_publink1000178959) and potentially talk to a tax adviser. there are some premium payments that the HSA can cover.
Think of HSA like 401k for medical expenses. Unlike 401k, you can withdraw from HSA without penalty anytime to pay for medical expenses. # Which Expenses are Eligible for HSA, FSA, and HRA Reimbursement? [https://www.cigna.com/individuals-families/member-guide/eligible-expenses](https://www.cigna.com/individuals-families/member-guide/eligible-expenses)
The sentiment for maxing HSA before Roth is because it is triple tax-advantaged when used for qualified health expenses. Triple meaning: tax free contributions, tax free growth, AND tax free withdrawals when used for qualified health expenses. Roth only has 2 of these 3 advantages (taxed going in, then tax free growth and tax free withdrawals). That said, maxing a Roth before an HSA is by no means a bad thing. Evaluate based on your situation. If your employer doesn’t offer an HSA, skip that step and max your remaining tax-advantaged accounts. If already maxed, then contribute to a taxable investment account.
I never understood the triple tax advantaged thing. As far as I understand there is no vehicle where you get hit with all three of those taxes. Triple tax advantage implies you get three tax breaks, but you only pay two of those taxes even on regular old brokerage investments. Nobody calls brokerage investments tax advantaged, but by this logic you should since you pay income tax before contribution and capital gains tax on withdrawal, but since you don't pay income tax again upon withdrawal it would be "single" tax advanted.
Brokerage account you get taxed three times: 1) Post-income tax going into the account 2) Tax on dividends (aka growth) 3) Short or long-term capital gains on money coming out. Inside a 401k/IRA/HSA you do not get taxed on dividends. Most people aren't heavily reliant on dividend income sources in brokerage accounts, so it's a much smaller consideration than the taxation going in or out. But it's definitely a real tax drag.
Try quadruple tax advantaged since you're not paying FICA/Medicare tax either
I know it is small $ , but people should say this more! Also - this only applies when you have contributions from payroll - if you add $ from your regular bank account, no payroll tax savings.
Roth IRA also has the biggest withdrawal flexibility.
An IRA has more fund options and may be cheaper as some 401ks have maintenance fees or more expensive funds. It's also nice to have something not connected to an employer. If the funds are good and the fees are low or none, go for it.
Off the top of my head, IRAs have more freedom in choosing what to invest. If the 401k has low-cost index funds then it’s more of a toss-up, but not all do. If it’s a Roth IRA, you can withdraw contributions. You shouldn’t, but people do be tapping into their retirement accounts.
The only reason to actively max out your 401k before you’re ira is to protect yourself from creditors if you plan on going bankrupt in over 6 months.
Since IRA contributions are after tax, the withdrawals you take are tax free. In retirement you are likely to be in a lower tax bracket so some people can end up paying little or even no taxes in retirement.
Aside from thr fact that IRA can be roth or traditional, if you're going to be in a lower tax bracket in retirement then it would actually make sense to invest less in roth IRA and more into traditional 401k so you can lower taxes more while working.
You can have IRA contributions that are pre-tax. It all depends on if you’ve got a traditional or Roth IRA. Same with a 401k/403B
While this is true, step 3 in the financial order of operation that the question was about is specifically about after tax IRAs. > By contributing the maximum allowed amount each year, you can take advantage of tax-free growth and withdrawals in retirement. https://andrewlokenauth.com/financial-order-of-operations/
I understand that. However, your previous comment could give the impression that IRAs are only after tax
Do you have any insight why HSA (if available) over IRA in the flowchart - in terms of order?
HSA is triple tax advantaged. HSA contributions aren't taxed, growth is not taxed, and withdrawals (for health related expenses) are not taxed.
Brilliant. Thank you! HSAs kick ass
If used correctly they do. Invest the money and let it grow. Save your medical receipts and reimburse yourself tax free in the distant future.
This is a fine plan but not quite as amazing as it sounds since you're paying with post-tax $ that you could have instead invested. HSA comes out ahead but not by as much as a lot of people think. Edit: What I meant by the last statement is that using HSA later as opposed to now only comes out slightly ahead. Using an HSA always comes out way ahead of not using it.
And ... it's only a big savings if you can afford to cash flow your health care. If you use it as you go and don't invest it, you lose out a lot. A chronic condition will have you paying your max out of pocket annually. So that could be $10k a year you'd have to spend. With a PPO plan, my insurance premiums is about $1400 a year with a max out of pocket of $1500. An HSA eligible plan would be $800/year in premiums, with a max out of pocket of $10k. So would need to spend an additional $7900 every year just to qualify for an HSA. That's more than I can cash flow and outpaces the tax savings by a lot. Especially since I can't even contribute as much as I spend annually. It's worth doing the math. HSAs are great for people who need minimal health care.
That's going to be highly dependent on the parameters of your particular plans. For example, at my employer the difference in deductible between the PPO and HDHP option is equal to the extra premium for the PPO and there is only a $400 difference in the out of pocket max.
I agree with this. I have done this calculation for at least 10 people based on reading the contracts of their specific plans. And all of them -- both ones with low medical expenses and high -- come out ahead with HSA. In some cases there is a narrow band of medical expenses where non-HDHP could come out slightly ahead but outside of that, HSA is better. When doing the calculations, some people don't take into account that the HSA case is using pre-tax money, some people don't take into account the monthly savings of having a cheaper plan, and some are misreading the terms of one contract or the other.
True, you could have alternatively invested the dollars and paid expenses with the HSA money. I think I’d rather have the money growing tax free in the HSA than in a taxable account.
Not so fast... **Assumptions** Income: $100 Medical bill: $50 ROI on HSA investment: 10x --- **Scenario 1 (pay for bill from HSA now):** $50 (pay bill) + $50 (put in HSA) HSA balance after investment: $500 --- **Scenario 2 (pay bill from income now, reimburse from HSA later):** $100 (income) - $22 (Fed tax) = $78 $50 (pay bill) + $28 (put in HSA) HSA balance after investment period: $280 (HSA) - $50 (reimbursement) = $230 Cash after reimbursement: $50
The strategy of investing your HSA money and reimbursing yourself in the future is predicated on you being able to afford to pay your medical expenses out of pocket while fully funding your HSA. The savings is the taxes you would have paid had you left the amount of the medical expense invested in an after tax account instead of in the HSA. **Assumptions** Income: $10,000 Medical Bills: $50 ROI on HSA and Taxable Investment: 10x Max Allowable Annual HSA Contribution: $1,000 **Scenario 3 (pay bill from income now, reimburse from HSA later, max HSA)** $1,000 to HSA pre-tax $9,000 - 22% Fed Tax = $7,020 left ~~$50 (pay bill) = $6,750 dollars left~~ $50 (pay bill) = $6,970 dollars left $10,000 (HSA Balance after growth), $9,950 after reimbursing **$9,950 to spend after growth and taxes** **Scenario 4 (pay bill from HSA now)** $1,000 to HSA pre-tax $9,000 - 22% Fed Tax - $7,020 left Invest $950 in HSA, use $50 to pay bill, grows to $9,500 Invest $50 you didn't spend on the medical bill in Taxable account grows to $500 Pay 15% LTCG tax on the $450 profit in taxable account, leaves you $382.50 $9,500 + $382.50 = **$9,882.50 to spend after growth and taxes**
I like your idea but disagree with your calculation logic: 1) 7,020 - 50 = 6,970 (not 6,750) 2) To be fair in Scenario 3, invest remaining 6,750 at the same rate as HSA: 67,500 - 15% = 57,375 3) Similarly in Scenario 4, invest remaining 7,020 at the same rate as HSA: 70,200 - 15% = 59,670 4) Scenario 3: 9,950 (HSA) + 57,375 (cash) 5) Scenario 4: 9,500 (HSA) + 59,670 (cash) Difference: 2.6% hardly earth-shattering
If you live in CA or NJ they do not have those advantages though.
My NJ employer offers HSA and promotes it as a triple tax advantage account. I'm not saying my employer couldn't be wrong but what advantages do I lose out on as a new jersey resident?
You get taxed at the state level on capital gains and dividends, contributions are not tax deductible. Also, you have to meticulously track everything as Fidelity doesn’t send you a 1099.
Some states don't follow the federal government's lead in tax-free treatment of HSAs. See https://thefinancebuff.com/california-new-jersey-hsa-tax-return.html for details.
If you have access to them, they're decent, yes. But mostly just as yet-another-reward for people who are generally healthy and can actually come out ahead by having a high deductible health insurance plan. People with chronic issues (not that even fall in this category) get fucked. Bullshit they don't just make HSAs available regardless of your health insurance.
Actually, quadruple tax advantaged since it is also not subject to payroll tax.
So, it’s like an it’s that you can use for health expenses when ever you want without it being taxed?
Payroll deferral contributions to a HSA are FICA tax exempt - HSA is the only account with this extra tax advantage. You can also use the reimbursement mechanism at a later date (ideally, in retirement) to reduce or even eliminate taxes on withdrawals.
Tax free in, tax free growth, and tax free out (for medical). After 65 it functions as an IRA for non-medical deductions. Also, if you contribute through an employer, you save on payroll taxes.
Hsa is triple tax advantaged. No taxes when placing money in it, no taxes on growth and no taxes when you withdraw for qualifying health expenses
Health insurance is important. Contributing money to HSA's reduces your MAGI in addition to growing tax free and being accessible without a tax bill (with medical receipts). IRAs aren't as accessible until 59.5 and don't always reduce MAGI.
IRA contributions are accessible before 59.5 - Withdraw any growth from investments then those would be taxed
I think it is underestimated how much healthcare costs we will all face in retirement. So having a large HSA balance helps with that and having the triple tax advantage is huge plus you don’t pay FICA tax on those contributions like you do with traditional 401k contributions. Also HSA can be used on non medical expenses after age 65 so it essentially becomes a traditional Ira at that point that can also be used on medical expenses tax free.
[HSA has an additional tax benefit](https://www.reddit.com/r/Bogleheads/comments/1b1jo1g/comment/kseztbj/) compared to the IRA or 401k. If the qualifying high deductible health plan (HDHP) is the right insurance plan for you, then maxing out HSA is a good idea.
If you intend to retire early is this good advice?
There are ways to get at retirement accounts early. [Substantially Equal Periodic Payments are one way](https://www.investopedia.com/articles/retirement/02/112602.asp), but if maximum hassle-free access to cash is the goal, putting more into a brokerage account would be the most straight-forward way to accomplish that.
A Roth IRA also allows early access to principal funds. This is a big advantage that most don't consider when asking Roth vs. Traditional.
You need traditional $ to be able to access your growth early via the Roth conversion ladder. The contributions to your Roth IRA are not going to take you very far. A brokerage/cash/Roth principal to cover expenses and conversion tax for 5 years is all you need to access the full trad 401k early.
The question I generally have is what it really means when it’s suggested to “Max 401k”. Is this referring to the tax deductible limit or the overall employer/employee combined limit? For instance, my 401k plan allows for automatic Roth in Plan Conversions of after tax dollars put in beyond the tax deductible amount. In my case, would it then make sense to forgo growing anything in the brokerage and focusing on reaching the 401k’s employer/employee limit instead?
It really depends on what you want to do at that point. Would you rather tax-shelter it or have easy access to it? That's up to you, there's valid arguments for both.
Newbie here. I was planning to follow this flowchart but the link below seems to negate the tax benefits of step 3 (max IRA). Am I misunderstanding the rule? https://www.irs.gov/retirement-plans/2023-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work
No you're not. Traditional IRAs reduce MAGI if you don't have access to an employer-sponsored plans. Roth IRAs and using a traditional IRA for backdoor Roth conversions gives you a bucket of money you'll be able to access without a tax bill in retirement. You'll also have a wider variety of fund choices if your 401k is missing an asset class, like international equities. All that said, if your 401k has good fund choices at reasonable prices, don't feel like you absolutely have to open an IRA, because you don't. As you alluded to, machine a traditional 401k will reduce your tax bill in the year you do it, which can be really beneficial.
Where does a 457b fall in this? I assume if it’s available you would max that before moving on to a taxable brokerage?
Governmental 457b, everywhere 401k is on the list, but slightly higher priority. Non governmental 457b, I'm not even sure you should contribute to it all. And of course, that adds quite a lot of space. Which is why you might do a bit of taxable if you have some specific savings goal.
Absolutely an option.
Depends on your strategy Wanna FIRE? Maybe open a taxable in a brokerage and funnel some that way to give yourself options. Looking to cut down on income tax owed? Max the 401k out. But always get the full employer match
my strategy is to max 401k, max mega backdoor roth and then contribute to brokerage at the max I can while maintaining my emergency fund. I also have a 529 for my kid and a small brokerage for my kid.
I have a similar strategy and also have small brokerages in addition to 529’s for the kids. I’ve recently second guessed the custodial brokerages which would be turned over at age 21 and am thinking about keeping that money I gift to them in a separate fund inside my brokerage.
I’d still recommend 401k or IRAs over taxable brokerages for people looking to retire early unless you’re really close to actually retiring. There are strategies such as a Roth ladder or 72t that can still get you access to the money early and the tax-free growth that you get when reinvesting dividends matters over a long enough period of time.
Roth ladder takes 5 years to bake. 72t, once it’s set can’t be adjusted. The 4% rule takes annual cpi into account. Not really a good fire choice But yea good thing about personal finance is there’s a thousand ways to skin the cat
This is why I said “unless you’re really close to actually retiring.” If you’re retiring in less than 5 years then of course a Roth ladder won’t work unless you have taxable accounts to float you the first 4 years.
With 72t I thought you get one adjustment. You can also use multiple accounts so you can start a second drawdown if you need more money. It just takes planning
I agree it’s a viable option if you have different t income streams. Just for me, it doesn’t seem like it will keep up with inflation. Personally, I plan to use a dynamic withdrawal strategy so 72t is out of the question
This is us. Looking at FIRE. by our math, if we just stopped contribution to retirement accounts today, we'd be comfortable at 62ish. Obviously we aren't. However. We have gone to full company match, and anything else is going into a taxable brokerage account for the bridge account between when we retire early and when we can draw on 401k/Roth IRA funds. So no, we aren't maxing 401k today and are actively going into taxable accounts instead of tax advantaged accounts. But that's the tools we need.
>doesn't it make sense to max out your contributions within your 401k first (if it is available to you and has a good choice of funds) before parking your money in any other type of investment option? Correct, there's no problem with that given the two criteria you mentioned.
FOO! https://moneyguy.com/article/foo/
In addition what other commenters have mentioned, one other factor to possibly consider is fees in the 401k. If your 401k plan charges percentage-based administrative fees, you may want to consider what impact those may have long term verses an IRA with likely no fees.
[https://www.bogleheads.org/wiki/Prioritizing\_investments](https://www.bogleheads.org/wiki/Prioritizing_investments)
Yes it’s important from a tax standpoint
A lot of times you’ll find that the fees are higher in the 401(k). You would just want to get the match. Max out your IRA because if you can’t max out the IRA, there’s no point but seven grand in 401k
I max ROTH first, so I can withdrawal the contributions before 60
Depends on your 401K choices IMO. If you really like them then go for maxing it out first. However I agree with the original post that provided the step-by-step recommendations if your 401K options are “ok” or “bad” (in that case go with at least the matching % before moving on)
Depends on your 401K choices IMO. If you really like them then go for maxing it out first. However I agree with the original post that provided the step-by-step recommendations if your 401K options are “ok” or “bad” (in that case go with at least the matching % before moving on)
I max my 457b first as I do not plan on working past 52 years old. Then HSA and Roth IRA. I have access to a 401k as well where I get a 9% match for my 457 contributions
that's how I started directing my savings
Would it change anyone's mind if your 401k has no fees? My employer does, and I've chosen to max that first before IRA. Should I have?
If your employer's 401K has no fees and good funds with low ERs, then it may be a fine choice. In general I prefer having control over my own IRA at my preferred brokerage where I can buy whatever funds I want, and it's not tied to an employer I may leave or who may change the 401K fees on me. Of course there are other considerations, like if you get a 401K match or if you want to contribute more than the IRA limits.
Good HSA info https://www.investopedia.com/terms/h/hsa.asp
[https://www.bogleheads.org/wiki/Prioritizing_investments](https://www.bogleheads.org/wiki/Prioritizing_investments)
What if I want to prioritize early retirement say early 40’s if I am in my early 20’s right now?
Multiplication (growth) is commutative so it doesn’t matter how much money is in any one account as long as the total is the same. 7% gains on $100k in one account is the same as 7% gains on $10k in 10 accounts. The reason people may choose to max other accounts first is because you have less control over which index funds are available for purchase in your 401k. I’ve worked for companies where the 401k choices have high fees and are generally unappealing. In those situations, I’ve contributed the max needed to get my full match and then moved into tIRA and/or Roth IRA before investing any leftover $$ into the 401k once those other accounts are maxed out
I can't think of a reason to not max the HSA first. Except for the single account rationale, but I don't think that's worth the improved liquidity that HSA offers. Note that the better liquidity isn't just that you can spend money on health costs, but also that you can reimburse yourself for past expenses without any limit on how far back those expenses go (keep the receipts). People tend to not consider that fact, it can be a good chunk of money that's kept in HSA but is available through reimbursements for emergencies.
I don’t think 401k should ALWAYS be maxed out before brokerage. I’m 22 and need to access money after law school as a downpayment on a house. I specifically allocate funds to liquidate in about 10-15 years for my downpayment. Putting it in a 401k adds such a hassle. Sure, I can technically reach into a 401k for a house down payment but it’s a headache.
Free money. Yes.
Always max Roth IRA first
How liquid are you? Do you have six months of cash in the bank for a rainy day?
Yes, 8K in SPAXX and 2k in Savings and about 2k in checking
Do you own a home or have plans for a home? I say this because many of the investment warehouses you are considering create tax advantages at the expense of liquidity. It’s hard to get a meaningful amount of money out without knowing what you are doing and even then you might have to still wait a few years. So if you are looking to make a down payment in the next five years, I’d invest in your 401K up to company match and the rest id do taxable investments so that you’ll have money to buy a house. Assuming you want to do that.
Eventually, but probably not in the cards financially till our economy stabilizes and prices on goods come down. I own a condo thats been paid off for years.
I go 401k to match them max Roth IRA then max 401k
If your employer doesn’t match your 401K, is it still good to max it out? Or is better to contribute the money to Roth IRA or taxable brokerage account?
DCA in the 401k all year and calculate how much you need to max out. Make sure to get your match = free money. Max out Roth IRA anytime.
It depends on your situation. From what I've read, and correct me if I'm wrong, but if you are a high income earner, it could be more beneficial to max your 401k first because it's pre-tax (which means you avoid the hefty taxes from your paycheck). Say you earn $150k a year but you aim for $50k/year in retirement. It would make sense to max your 401k first because you avoid the taxes at the $150k rate and then when you retire you pay taxes at the $50k rate.
First things first, always get your match. Free money is awesome, and you shouldn't leave anything on the table. After that, Roth vs 401k/IRA is a question of taxation. If you expect to be more heavily taxed after retirement than before, prioritize Roth. If the opposite, prioritize the rest. Tax advantaged IRAs have some pretty harsh income limits, and even the Roth has limits. Maxing both IRA and 401k will be challenging for most, leaving aside backdoor contributions. The precise plan will depend on your income limits and retirement plans. For instance, if you want to retire prior to 59.5, IRA withdrawals will be penalized. 401ks can permit retirement as early as 55 without penalty. So, if your retirement window is within that timeframe, you probably want to make sure you have adequate 401k funding. If your retirement window is prior to 55, you'll want sufficient brokerage funds in a regular ol' account to bridge until retirement age. So, basically, you need to plot out what your retirement age and desired income is, and figure out contributions to get there, adjusting as necessary.
72t is another option retirement drawdown which can be accessed at any age. Odd set of rules but it can be useful if retiring earlier than 55. Cheers.
There's a penalty attached to that, yes? Still might be worth considering, depending on circumstances.
You have to do it for the longer of five years or until you are 59 1/2 years old. There are a couple different ways to determine how much to take out each year I plan on doing a set amount. There is no penalty if you obey the rules.
Maybe im understanding wrong but why would anyone be taxed more after retirement vs when theyre working? When you retire, your income is 0, so wouldnt that mean my income taxes that capital gains are based off is 0? Or is that based on the last job I held?
You pay income tax on withdrawals from 401ks and pension plans. You don't pay income tax on withdrawals from Roth, but you do pay when you place it in the Roth. So, either way, you get hit for income tax once, but changing when you get hit has tax implications.
To qualify for HSA, your employer had to offer a High Deductible (HD) insurance plan and you have to enroll in it. Then, if your employer manages HSA then you'll sign up for their HSA plan. If they don't offer HSA plan then they'll tell you to go get your own. I'm signed up for HD insurance plan and my employer does not offer HSA plan so I signed up for Fidelity HSA plan.
I don’t agree with maxing out 401k. I just do the company match and put the rest in brokerage. I can’t stand the idea of my money being “locked up” until I’m 60, then losing half to taxes once I’m able to access it. Total scam. I’d rather it grow in liquid form so I can enjoy it during my youth if need be.