The Essentials of Pensions, 401Ks, IRAs and Roths

Retirement and investment terms can be confusing; their names rarely give an accurate description of what they are, and most of our friends and neighbors will offer differing opinions on each type of account. Pensions, 401Ks, IRAs and Roth are all retirement vehicles, but they are not the same.

Structural Differences in Retirement Accounts

Retirement vehicles can be divided into 3 unique types as follows:

Pension Plans

A Pension Plan is unique. It is a retirement plan in which your employer promises you a certain monthly or annual payment when you retire; typically, these benefit payments are promised for life, but there are usually other options offered. The unique aspect of a pension is that you do not own the money in the plan. All you “own” is the promise your employer has made to you. If your employer gets into financial trouble, this pension promise can be reduced significantly in bankruptcy.

You don’t make any contributions, you don’t control the investment decisions in the plan, and you just wait until you’re allowed to start collecting on the promise. When you start collecting those payments, they are taxed as regular income.

401Ks and IRAs

The second type consists of 401Ks and IRAs. Each is a retirement account to which you contribute, and you own the money inside each account (with a few limitations listed below). When you contribute to a 401K or to an IRA, the contribution is usually deducted from your taxable income. As the money inside the 401K or IRA grows, it is exempt from taxes. When you withdraw the money for retirement, you are taxed on the amount of the withdrawal as if it were income you received from a job. It becomes your “retirement salary” in a sense.

Employers can also contribute money to a 401K on your behalf. If they do, the employer is entitled to limit your ownership of the money they contribute. You always own 100% of the money you contribute, but a very common employer “vesting” schedule would look like this:

Years of Employee Service Share of Employer Contribution Owned By Employee

0 to 2 years 0% owned by employee

2 years 20% owned by employee

3 years 40% owned by employee

4 years 60% owned by employee

5 years 80% owned by employee

6 or more years 100% owned by employee

In the vesting example above, when you have worked for your employer 6 years, you own 100% of all the money in the account. You’ve always owned your money, but now you own the employer’s money as well.

Roth IRA

The last type consists of Roth IRAs. There are various forms of Roths, but the critical components are the same. You own 100% of the money you contribute. If your employer contributes, there may be a vesting schedule similar to the one above. For tax purposes, you do not get to deduct contributions from your income. However, as the money grows inside the Roth it is exempt from taxes, and when you withdraw money from your Roth, there is no tax. In terms of tax treatment, the Roth is the “flip side” of the IRA.

The critical tax differences are illustrated below:

Tax Treatment Taxation Taxation On
Type of account Of Contribution Of Growth Withdrawals

IRAs/401Ks Tax deductible Not taxed Taxed as income

Roths No tax deduction Not taxed Not taxed

How Much Can You Contribute

Each of these retirement vehicles has contribution limitations. Pensions are limited by a complex formula, but it applies to your employer. Remember, only the employer is making a contribution to your pension.

401Ks have the largest contribution limit. While these specific limits will no doubt change a bit from year to year, the relative difference has remained roughly the same for a number of years and is likely to remain so. For 2020, the limits are:

401Ks – maximum contribution of up to $19,500 from your salary or bonus. If 50 years or older, $26,000. There are no income limitations on the contribution amount.

IRAs & Roths – maximum contribution of up to $6,000. If 50 years or older, $7,000. Unfortunately, there are potential income limitations to your IRA/Roth contribution. Check with your tax preparer, but depending upon how much you make, your contribution level may be restricted.

As you can see, even if you’re not subject to income limits, the 401K allows you to contribute on a tax-deductible basis more than 3 times the amount you can contribute to an IRA or Roth. If you’re lucky enough to work for an employer who offers a matching contribution, we would strongly advise that you contribute the maximum amount your employer will match. If you don’t, your walking away from almost-free money. We say, “almost” because you must remain employed long enough to fully vest the employer’s contribution.

Investing Your Retirement Funds

While a traditional pension plan does not allow you to take control of the investments in the plan, all the other retirement vehicles provide you with a significant degree of control. How you invest your money is a critical issue – too big to be handled thoroughly here – but a few guidelines will help.

Market Uncertainty and Inflation

Pay attention to the two primary risks – market uncertainty and inflation. Everyone knows that stocks and bonds come with some amount of risk. But too few people realize that inflation poses a major risk to your financial future. At just 3% average annual inflation, the purchasing power of your retirement nest egg will be cut in half in 22 years. You can’t just sit in a money market account and overcome inflation; you must engage the markets.

Timing the Markets

You can’t time the markets. Nobody has done this successfully over the long-term. Market timers may seem to be “winning” for a period of time, but inevitably they lose, and lose big. Make a plan and stick with the plan; don’t jump in and out.

Emotion and Reason

Balance your emotions and reason. We all have intelligence and emotions. We can all be pushed to our breaking point. None of us likes market volatility, and our emotions can get the best of us at either end. It’s easy to get greedy when the market is hitting new highs, and very easy to get fearful when the market is falling. You shouldn’t buy out of greed, and you shouldn’t sell just out of fear. That’s how to lose money over the long-term. You have to develop a reasonable investment plan and stick with it during the emotional highs and lows.

Withdrawals, Taxes and Penalties

All retirement accounts have withdrawal rules. They can be simple enough, but if you don’t pay attention and break the rules, it can get expensive quickly.

Pensions

Pension plans set their own specific rules but generally revolve around the traditional retirement age of 65. At the retirement age, you have been promised a certain monthly payment which can be paid over your life, or over your life and your spouses lives, or over some other time span. Your pension administrator will tell you what the monthly payment options are. Many pensions also let you take a lump-sum one-time payment equal to the calculated value of your monthly payment promise. Again, the administrator will tell you what this amount is, if a lump-sum payment is allowed. More on those pension options here.

If you take one of the monthly options, then the payment you receive is taxable, just like regular income.

If you take the lump-sum option, the payment will be 100% taxable if you don’t roll it over into an IRA. If you do roll it over into an IRA, then the rollover is not taxable. Later, as you take withdrawals from the IRA, each withdrawal is taxable.

It is impossible to determine for all cases whether the monthly payment or the lump-sum rollover to an IRA is the best option. You need to have a financial advisor analyze this so you can make the best decision for your circumstances.

If you leave your employer before retirement, you’ll have some variation of the options above. The amount of your monthly payment and of the lump-sum payment will be lower than if you remain until retirement age, but you should have options on how to take the money.

401Ks and IRAs

401Ks and IRAs are very similar to one another. If you withdraw money from an IRA or a 401K and roll it over into another 401K or IRA, there is no tax on the rollover. However, if you withdraw and fail to make a rollover, then there are tax consequences.

If the withdrawal is made when you’re 59 ½ or older, you only have to pay income taxes on the withdrawal amount.

If the withdrawal is made before you’re 59 ½, then you have to pay income taxes AND you will have to pay a penalty tax for an early withdrawal. There are some exceptions:

Penalty Tax Exceptions:

Hardships – if you meet certain stipulated hardship circumstances, you can avoid the penalty taxes
SEPP Withdrawals – if you agree to take Substantially Equal Periodic Payments (SEPP) for the longer of 5 years or until you turn 59 ½ you can avoid the penalty taxes.

Roths

Roths allow you to withdraw your money at any time, but there may be penalties. In order to make a “qualified” withdrawal and avoid penalties, you must be 59 ½ or older, and at least 5 years must have passed since you first contributed. Having said that, you may withdraw your contributions at any time without penalty. It is your earnings which are subject to the penalties above. If you withdraw earnings, you must meet the test above.

The Good, Bad and Ugly

In summary, it’s mostly all good. All these retirement vehicles allow you to prepare for retirement, and if you manage them correctly, it can be a very nice retirement. All of them provide a tax benefit somewhere in the process from contribution through withdrawal. Many of them are fully or partially funded by your employer. The “bad” part is that you cannot escape taxes entirely, and if you’re not careful bad investment decisions will undo the rest of the benefits. The only ugly part occurs when you run afoul of withdrawal rules and start to incur penalty taxes.

Making the most of your retirement opportunities may require some professional advice. Ask a trusted, objective financial advisor to help you determine which options are best for you, and you’ll be well on your way to a successful retirement.

Scott Sommers

A Health Savings Account (HSA) is a tax-advantaged savings account designed to help individuals with high-deductible health plans (HDHPs) pay for qualified medical expenses. What sets HSAs apart is their triple tax advantage: contributions reduce taxable income, earnings grow tax-free, and withdrawals for eligible medical expenses aren’t taxed.

For anyone looking to reduce healthcare costs, save on taxes, and even prepare for retirement, an HSA is a powerful financial tool. Here’s why it matters:

Quick Overview

Tax Benefits: Pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified medical use.
Ownership: The account is yours, even if you change jobs.
No RMDs: No required minimum distributions at any age.
Investment Options: Access to numerouse investment funds and it can be used to invest for long-term growth.
Retirement Use: After 65, funds can be used for non-medical expenses (taxed as income).

Eligibility and Contributions

To qualify for an HSA, you must enroll in a High Deductible Health Plan (HDHP). For 2025, that means a minimum deductible of $1,650 for self-only coverage or $3,300 for family coverage. Being enrolled in other coverage, like Medicare, will disqualify you.

Contributions can come from you, your employer, or even family members, and must be cash (not investments or property).

For Health Savings Account, in 2025, individuals can contribute up to $4,300 and families up to $8,550, with an additional $1,000 catch-up contribution allowed for those 55 and older.

Coverage Type	2024 Limit	2025 Limit	Increase
Individual	$4,150	$4,300	$150
Family	$8,300	$8,550	$250
Catch-Up Contribution (Age 55+)	$1,000	$1,000	No change

Health Savings Account Benefits

HSAs offer unmatched tax perks:

Pre-tax contributions lower your taxable income.
Tax-free growth means the money you invest in your HSA can grow without being taxed each year – so your savings build up faster.
Tax-free withdrawals for qualified medical expenses keep more money in your pocket.

Compared to other accounts like 401(k)s and IRAs, HSAs have no required minimum distributions (RMDs), making them ideal for long-term wealth building. The account is also fully portable – you own it outright even if you change jobs or insurance plans.

Managing Your Account

Maximizing an HSA starts with selecting the right provider – look for low fees, robust investment options, and user-friendly interfaces. Many HSA administrators offer the ability to invest your balance in mutual funds, ETFs, or other vehicles.

Keep thorough records of your contributions, distributions, and receipts. This documentation ensures IRS compliance and preserves your tax advantages. Consider using your HSA debit card for convenience, but always retain proof of qualified expenses.

Using Your HSA

HSA funds can be used for a broad range of medical expenses, including:

Keeping receipts is crucial, especially if you choose to pay out-of-pocket and reimburse yourself later – a strategy that allows your HSA investments to grow tax-free for longer.

Investment Options

HSAs aren’t just for short-term spending – they can serve as investment accounts for long-term financial planning. Investment strategies vary based on your goals:

Investment Strategy	Cash Reserve	Investment Allocation	Best For
Conservative	100% in cash	None	Immediate medical needs
Balanced	Amount equal to annual deductible	30% stocks, 70% bonds	Balancing current and future needs
Growth-Focused	10% in cash	50% stocks, 40% bonds	Long-term retirement planning

Experts recommend keeping at least enough cash to cover your deductible and investing the rest according to your risk tolerance.

What's your risk tolerance? Your tolerance to risk will have a big impact on the types of investments you choose. However, not many people know what their risk tolerance is. Discover your risk tolerance by taking our Risk Tolerance Questionnaire.

Retirement Planning

When used correctly, HSAs can be a strategic retirement planning vehicle. After age 65, funds can be used for non-medical expenses without penalty (though they are taxed as ordinary income). That flexibility makes HSAs a powerful complement to 401(k)s and IRAs.

Consider these retirement-focused strategies:

Cover current healthcare costs out-of-pocket to let your HSA grow.
Max out contributions after funding your 401(k) or IRA.
Use your HSA to pay for Medicare premiums, long-term care, and other out-of-pocket medical costs.

Tax Implications

The tax benefits of HSAs are a cornerstone of their appeal:

Contributions reduce your taxable income.
Growth isn’t taxed as long as it stays in the account.
Distributions for qualified expenses are also tax-free.

However, distributions for non-qualified expenses before age 65 are subject to income tax plus a 20% penalty. After 65, only ordinary income tax applies.

Work with a tax advisor to stay within IRS guidelines and maximize your savings for the best results.

Comparing a Health Savings Account to Other Accounts

HSAs outperform many similar financial vehicles in flexibility and tax efficiency. Here’s how Health Savings Accounts compare to other financial accounts:

Feature	HSA	FSA	401(k)	IRA
Triple Tax Advantage	✅	❌	❌	❌
Withdrawals for Qualified Medical Expenses Are Tax-Free	✅	✅	❌	❌
Funds Roll Over Each Year	✅	❌	✅	✅
Account Is Yours to Keep	✅	❌	✅	✅
No Required Minimum Distributions (RMDs)	✅	❌	❌	❌

Disclaimer: The information presented in this table is for general informational purposes only and is used as a broad comparison tool. Contribution limits, tax rules, and eligibility requirements are subject to change depending on the intricacies of each account type.

Unlike Flexible Spending Accounts (FSAs), HSA funds roll over yearly and belong to you regardless of employment. And unlike 401(k)s or IRAs, you can use HSA funds anytime for qualified medical expenses with no penalties.

Family and Estate Planning

HSAs can be used for qualified medical expenses for your spouse and dependents – even if your HDHP doesn’t cover them. Upon your death, the HSA transfers to a named beneficiary. If that’s your spouse, it remains an HSA; for others, it’s treated as taxable income.

To maximize long-term value:

Set beneficiaries carefully.
Use the account to cover family healthcare expenses and reduce taxable withdrawals.
Include your HSA in your estate planning discussions.

Portability and Flexibility

An HSA travels with you. Change jobs, move states, switch health plans – your HSA stays intact. You can even open multiple HSAs for different strategies (e.g., short-term spending vs. long-term investing).

This flexibility allows you to build a healthcare safety net that evolves with your needs.

Health Care Integration

HSAs are designed to complement HDHPs by reducing your net out-of-pocket costs. They provide a safety buffer against large medical expenses and a way to pay for ongoing healthcare needs like:

Preventive care
Specialist visits
Prescriptions
Mental health services

When used strategically, HSAs help make high-deductible plans more manageable and affordable.

Is an HSA Right for You?

A Health Savings Account is more than just a savings tool – it’s a cornerstone of a smart financial and retirement strategy. With triple tax advantages, investment potential, and unmatched flexibility, HSAs can significantly reduce healthcare costs and support long-term financial goals.

To get the most out of your HSA:

Confirm HDHP eligibility and stay within contribution limits.
Invest your surplus wisely for long-term growth.
Keep meticulous records to protect your tax benefits.
Consider working with a financial advisor to optimize your strategy.

Whether you’re saving for next year’s doctor visits or planning decades in advance for retirement, an HSA belongs in your financial toolkit.

Schedule Your Complimentary Consultation

Meet Greg Welborn

Greg Welborn is a Principal at First Financial Consulting. He has more than 35 years’ experience in providing 100% objective advice, always focusing on the client’s best interests.

Meet Greg Welborn

Greg Welborn is a Principal at First Financial Consulting. He has more than 35 years’ experience in providing 100% objective advice, always focusing on the client’s best interests.

FAQ | Health Savings Account

What is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is a tax-advantaged savings account available to individuals who are enrolled in a High-Deductible Health Plan (HDHP). It allows you to set aside money on a pre-tax basis to pay for qualified medical expenses. Funds in an HSA can be used to cover deductibles, copayments, prescriptions, dental and vision care, and more - all while reducing your taxable income. The account is owned by you, not your employer, and the money rolls over year to year.

Who is eligible to open an HSA?

To qualify for an HSA, you must meet the following criteria:

Be enrolled in a qualified High-Deductible Health Plan (HDHP).
Not be enrolled in any other health insurance coverage (like a spouse’s plan or Medicare).
Not be claimed as a dependent on someone else’s tax return.

For 2025, an HDHP must have a minimum deductible of $1,650 for self-only coverage or $3,300 for family coverage, along with a maximum out-of-pocket limit of $8,300 (individual) or $16,600 (family).

How much can I contribute to an HSA?

The IRS sets annual contribution limits for HSAs, which adjust for inflation. For 2025, individuals can contribute up to $4,300 and families up to $8,550. If you're 55 or older, you can contribute an additional $1,000 as a "catch-up" contribution. These contributions can come from you, your employer, or both combined, but they cannot exceed the annual limit.

What can I use HSA funds for?

HSA funds can be used to pay for a wide range of qualified medical expenses, including doctor visits, prescriptions, vision and dental care, and even some over-the-counter medications. If you use the funds for non-qualified expenses before age 65, you'll pay regular income tax plus a 20% penalty. After age 65, you can use the money for any purpose without a penalty - though non-medical expenses will still be taxed as income.

Can I invest the money in my HSA?

Yes, many HSA providers allow you to invest your HSA funds once your balance reaches a certain threshold, often around $1,000 or $2,000. You can invest in mutual funds, ETFs, and other securities. This gives your HSA the potential to grow significantly over time, especially if you don’t need to tap into it for short-term medical costs.

What happens to my HSA if I change jobs or health insurance?

Your HSA is yours to keep, no matter where you work or what health insurance you have in the future. It's a portable account, meaning you can continue using the funds for qualified medical expenses even if you're no longer enrolled in an HDHP. However, you can only contribute to the HSA while you're actively covered by a qualifying HDHP.

Can I use HSA funds for non-medical expenses?

Yes, you can use your health savings account for non-medical expenses. However, there are conditions you must meet.

If you're under age 65, using HSA funds for non-qualified expenses will result in income tax plus a 20% penalty.

If you're 65 or older, you can withdraw funds for any purpose without penalty - though non-medical expenses are still taxed as regular income (similar to a traditional IRA).

This makes the HSA a potential secondary retirement account for those who stay healthy and don’t use all their medical savings.