Your Next Best Dollar: Why the HSA Often Beats the 401(k)

When people think about long-term financial planning, the 401(k) is usually the first place their mind goes. But there’s another savings vehicle that quietly outperforms it in many cases and far more people should be paying attention to it: the Health Savings Account (HSA).

As Paul Denu, a leading expert in retirement and benefit strategy, explains, deciding where your next dollar of savings should go can dramatically impact long-term wealth. This concept sometimes called the “Next Best Dollar” strategy is all about prioritizing contributions for maximum tax efficiency and

long-term gain. And surprisingly, the HSA often comes out on top.

The Triple Tax Advantage That Changes Everything

The HSA stands alone as the only account that offers three major tax benefits:

• Contributions are made pre-tax

• Investment growth is tax-free

• Withdrawals for qualified medical expenses are tax-free

Paul often emphasizes how powerful this combination is. While 401(k) contributions are also pre-tax, withdrawals in retirement are taxed as ordinary income. By contrast, HSA dollars used for healthcare expenses which nearly all of us have in retirement are never taxed at all. For anyone expecting to face medical costs as they age, the HSA becomes an unparalleled savings tool.

The Real Impact: Thousands in Additional Spending Power

To illustrate the difference, Paul shares a simple comparison. Imagine contributing and investing $300,000 over time. In a 401(k), after accounting for taxes in retirement, the spending power drops to around $234,000. That same $300,000 in an HAS spent on qualified healthcare costs retains its full value.

That’s a $66,000 advantage from tax treatment alone. And that’s before considering another often-overlooked benefit: HSA contributions made through payroll also escape FICA taxes. Employees and employers both save an additional 7.65% on those dollars.

Why Your HSA Should Come Before Additional 401(k) Savings

Paul recommends a simple rule of thumb: always capture your employer’s 401(k) match first. That match is free money, and nothing beats a 100% return.

After that? The HSA often becomes the smartest place for the next dollar. It’s the only account with all three tax advantages, and for individuals on a high-deductible health plan, the long-term opportunity is enormous.

Using the HSA as a Stealth Retirement Account

Many people think of their HSA as a “spend it this year” account, but Paul encourages a different mindset. If you can afford to cover medical expenses out of pocket, letting your HSA balance grow can turn it into one of the most effective retirement tools available.

One strategy Paul highlights is the ability to reimburse yourself years or even decades later for medical expenses you’ve already paid so long as the expenses occurred after the HSA was opened and receipts are saved. That allows the account to grow tax-free while creating a reservoir of potential tax-free withdrawals in the future.

How to Invest Your HSA for Maximum Effect

To balance liquidity with long-term growth, Paul suggests keeping a small cash buffer around $2,000 to cover near-term medical bills. The rest should be invested.

Target Date Funds are a strong choice for many HSA holders. They automatically shift to a more conservative allocation over time, require little maintenance, and align investments with your future retirement timeline.

A Few Things to Watch For

An HSA isn’t available to everyone you must be enrolled in a high-deductible health plan. And while the benefits are compelling, they only materialize if the HSA is actually invested. Leaving large balances in cash means forfeiting years of potential tax-free growth. Keeping receipts is also key if you plan to reimburse yourself later.

The Bottom Line: Your Next Dollar Likely Belongs in Your HSA

The HSA’s triple tax advantage, investment potential, ability to reimburse yourself in the future, and payroll tax savings make it one of the most effective wealth-building tools available. After securing the employer match in your 401(k), shifting your next dollar into an HSA can deliver far greater long-term value.

Small, strategic choices today like reallocating savings into an HAS can turn into remarkably large benefits tomorrow. As Paul often says, “These decisions compound over decades. A little planning now goes a long way.”