Have a 401(k) and HSA? Don't Make This Mistake

by Maurie Backman | Courtesy The Motley Fool

Saving for retirement in multiple accounts is a smart move -- but set your priorities accordingly.

When it comes to saving for retirement, it never hurts to have multiple channels. For example, saving in a 401(k) or IRA is a smart move because those funds can be used for any purpose whatsoever in retirement. But funding a health savings account, or HSA, is also wise. While those funds are supposed to be earmarked for healthcare expenses and will be treated more favorably from a tax perspective if they're used for that purpose, medical bills are routinely an enormous expense for seniors, so having a dedicated account to pay for them is a solid move.

But new data from the Employee Benefit Research Institute finds that HSAs and 401(k)s don't mix as well as one would think. Specifically, it found that 56% of 401(k) participants reduced their contributions during the first year they made HSA contributions. And that's a mistake on a number of levels.

Why your HSA shouldn't trump your 401(k)

With an HSA, you can contribute money toward healthcare expenses that can be withdrawn at any time. In other words, you could fund an HSA today and take a withdrawal in three months to cover some near-term medical copays, or you could leave your HSA funds alone and carry them all the way into retirement.

Like 401(k)s, HSAs let you invest your money so it can grow into a larger sum in time. And HSAs also impose penalties for removing funds for non-healthcare purposes -- 20% of the sum you remove.