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Dallas, Texas, United States

Friday, November 29, 2019

401(k) + HSA + IRA

While reading online articles in preparation for writing my recent blog post about maximizing your pre-tax deductions, I came across a statement which I initially discounted because I did not understand it.  The author mentioned the annual maximum contributions one could make to retirement accounts if one had both a 401(k) and an Individual Retirement Account (IRA).  I had previously incorrectly supposed that one could not have an IRA account on top of an employer-sponsored 401(k) or 403(b) plan.

I see now that in addition to contributing to a 401(k) and a Health Savings Account (HSA), one could also save another six thousand dollars in an IRA.  For those over fifty-years-old, there is an extra one thousand dollars for a total annual contribution limit of seven thousand dollars.  Furthermore, an additional six or seven thousand dollars can be put aside in a separate IRA for a spouse even if the spouse does not earn income.

I think my initial confusion came about because of limitations on the pre-tax deductibility of the IRA when your employer offers a 401(k) plan.  If you make more than about twice median household income and you have a pre-tax 401(k), you cannot also deduct from your income tax your contributions to a traditional IRA.  I am not sure if there is any benefit to contributing to a traditional IRA if you cannot make pre-tax contributions.

An alternative to consider, however, is the Roth IRA in which you make post-tax contributions instead of pre-tax.  Unlike a traditional IRA, the benefit of a Roth IRA is that you do not have to pay taxes on your interest income in retirement.  This good deal from Congress to encourage Americans to save phases out for those making more than about three times median household income.

So in addition to contributing to your HSA and your employer-sponsored 401(k) or 403(b) plan, consider also investing in an IRA, whether Roth or traditional.  As your income increases over time, you might first put in just enough to your 401(k) to get the employer matching, then maximize your HSA contribution, followed by maximizing a Roth IRA contribution, and then returning to put any remainder of your available income in your 401(k) up to its annual limit.  You have some time to decide your financial priorities as the deadline for opening an IRA with funds that count toward the annual limit for the current tax year is not until April 15th of the following year.