Compliance Connection

HSAs and 401(k)s: Why Gen Z and Millennials Need Both Compliance

Submitted by Ginger Huff, Arkansas State Manager, American Fidelity Assurance Co.

Saving for retirement is an important part of life. Ideally, you should start saving when you enter the workforce. However, most people don't start that early, requiring them to save greater amounts later, or potentially leaving them with less money for retirement. Among the most common ways to save for retirement are employer-based plans such as a 401(k). A 401(k) allows employees to contribute a percentage of their pay. Sometimes, employers will match up to a certain amount. Gen Z and millennials may assume their 401(k) is enough, but that might not be realistic. Why? Inflation.

As inflation grows, the value of money decreases. In other words, you cannot buy as much with a dollar as you once could. Even if Gen Z and millennials save for retirement with a 401(k), it might not be enough. Inflation could take a "bite" out of their savings, and the amount they saved might not go as far as they expect. Fortunately, there are ways to make a more secure retirement. It's important for these generations to save beyond their employer-sponsored options. There are many tools to add money to retirement savings, while reducing taxes.

Combining retirement funds and lower taxes can make it easier for all generations to save. This is especially important since people are living longer. Another way to invest is by using a Health Savings Account (HSA)

An HSA can be used as a retirement fund to cover medical expenses without dipping into a 401(k). The contributions, earnings and interest are tax-free. When the money is used for eligible expenses, those withdrawals are also not taxable.

HSAs can be invested in stocks, bonds, or other assets, depending on the options available from your HSA administrator. This strategy allows account holders to take advantage of market gains without incurring capital gains taxes. After retirement, an HSA can cover health-related expenses and, at a certain age, withdrawals can be used for non-medical expenses. However, keep in mind that distributions for nonmedical purposes are required to be reported as taxable income.

While HSAs are growing in popularity, they remain an underused tool considering the advantages they offer. As you learn about your available benefits, consider how an HSA could help you prepare for your future.