Tax-Advantaged Accounts: 401(k), IRA, HSA, FSA

Some accounts get special tax treatment because the government wants to encourage you to save for specific goals — retirement, health care, dependent care. The four big ones most working Americans encounter are the 401(k), the IRA, the HSA, and the FSA. They each work a little differently, and a working knowledge of all four can quietly add up to thousands of dollars a year in tax savings over a career.

This is a plain-English overview, not tax or investment advice. For a feel for how monthly contributions compound over decades, our investing basics hub has worked examples. For more vocabulary, see compound interest and interest rate, and the Learn hub for related topics.

How "tax-advantaged" works in plain English

The U.S. tax code lets these accounts skip taxes at one of three points:

• Going in — you do not pay income tax on the money you deposit (a "pre-tax" or "tax-deductible" contribution).
• While growing — interest, dividends, and gains are not taxed each year.
• Coming out — withdrawals may be tax-free if used for the right purpose.

Each account uses a different combination of these. The IRS at irs.gov sets the contribution limits and rules, and they change almost every year.

401(k) — workplace retirement

A 401(k) is a retirement account offered by an employer (sometimes called a 403(b) at non-profits or a TSP for federal workers — same general shape).

The basics:

• You choose what percent of your paycheck goes into the 401(k).
• Many employers match part of what you contribute. This is essentially free money. The U.S. Department of Labor's Employee Benefits Security Administration (EBSA) at dol.gov/ebsa calls capturing the full match the most reliable return most workers can find.
• Your contributions usually go in pre-tax (lowering your current taxable income), grow tax-deferred, and are taxed when you take them out in retirement.
• A Roth 401(k) option, if your plan offers it, flips the timing — money goes in after tax, grows tax-free, and qualified withdrawals come out tax-free.
• The IRS sets a yearly contribution limit. (For example, 2024's limit was $23,000 for under-50 workers, with a higher catch-up limit for 50+. These numbers change every year — always check the current figure at irs.gov.)
• Withdrawals before age 59½ usually trigger a 10% penalty plus regular income tax.

IRA — individual retirement account

An IRA (Individual Retirement Arrangement) is a personal retirement account you open at a broker or bank, separate from any employer.

Two flavors most people compare:

• Traditional IRA — contributions may be tax-deductible (depending on your income and whether you have a workplace plan), grow tax-deferred, and are taxed when you withdraw.
• Roth IRA — contributions go in after tax, grow tax-free, and qualified withdrawals are tax-free. There are income limits for direct Roth IRA contributions.

A few shared notes:

• The IRS sets a yearly combined contribution limit across both kinds of IRAs (for example, $7,000 in 2024 for under-50 savers, with a higher catch-up amount for 50+; these change every year — see irs.gov).
• Withdrawals before 59½ usually trigger a 10% penalty plus tax (with some narrow exceptions like first-home, qualified education, and disability).
• Roth IRAs have a few special rules, including the ability to withdraw your contributions (not earnings) at any time tax- and penalty-free.

The IRS Retirement Plans page at irs.gov/retirement-plans has the current rules and limits.

HSA — health savings account

An HSA is paired with a High-Deductible Health Plan (HDHP). It is the most tax-advantaged account in the federal system — sometimes called the "triple tax-advantaged" account because it skips taxes on all three sides:

• Contributions go in pre-tax (or are tax-deductible if you contributed outside of payroll).
• The money grows tax-free.
• Withdrawals for qualified medical expenses are tax-free at any age.

Other features:

• The money is yours. It does not expire and is not "use it or lose it."
• After age 65, withdrawals for non-medical purposes are taxed as ordinary income (no penalty), basically like a traditional IRA.
• The IRS sets a yearly contribution limit and a minimum HDHP deductible. Both change every year — see IRS Publication 969 at irs.gov.
• You can invest the balance once it crosses a threshold set by your HSA provider, often around $1,000-$2,000.

For people who can afford to pay current medical bills out of pocket and let the HSA grow as a stealth retirement account, it is one of the most tax-efficient vehicles available.

FSA — flexible spending account

An FSA (Flexible Spending Account) is also for qualifying medical expenses, but it is set up by an employer and works very differently from an HSA.

The basics:

• You decide how much to contribute at the start of the plan year.
• Contributions are pre-tax, taken out of your paycheck across the year.
• You can use the money throughout the year for qualified medical expenses.
• Most plans are use-it-or-lose-it — money left at the end of the plan year usually goes back to the employer. (Federal rules allow employers to offer a small carryover or a grace period, but they are not required to.)
• The IRS sets a yearly contribution limit (for example, $3,200 in 2024; this changes every year — see irs.gov).

There is also a Dependent Care FSA for qualifying child care expenses, with its own separate yearly limit.

You usually cannot have an HSA and a regular health FSA at the same time. The IRS rules in Publication 969 at irs.gov lay out which combinations work.

A quick side-by-side cheat sheet

A common contribution priority list

A general framework many CFPs and the EBSA describe (not a guarantee for your situation):

1. Contribute to your 401(k) up to the full employer match — capture the free money.
2. If you have an HSA-eligible HDHP, contribute to the HSA — most tax-advantaged account in the system.
3. Contribute to a Roth IRA (if income-eligible) or Traditional IRA up to the limit.
4. Increase your 401(k) contribution toward the IRS limit.
5. Use any FSA strategically for known yearly medical or dependent care expenses.
6. Anything beyond that goes into a regular taxable brokerage account.

The right order for you depends on your income, your tax bracket, and what is offered at work. The DOL EBSA participant guides at dol.gov/ebsa walk through workplace plans specifically.

Common traps

A few patterns the IRS, EBSA, and SEC warn about:

• Leaving the employer match on the table.
• Cashing out a 401(k) when changing jobs. Rolling it into an IRA or new 401(k) is usually better.
• Ignoring fees inside the plan. High-fee funds can cost tens of thousands over a career.
• FSA over-funding. Any leftover may go back to the employer at year end.
• Treating an HSA like checking instead of letting it invest.

Free help

• IRS Retirement Plans at irs.gov/retirement-plans.
• IRS Publication 969 for HSAs and FSAs.
• DOL EBSA at dol.gov/ebsa.
• MyMoney.gov at mymoney.gov.
• The Investor.gov compound interest calculator at investor.gov.

A note on advice

This is general information, not tax or investment advice. The right account mix depends on your income, your tax bracket, your job benefits, and your goals. Talk to a CPA for tax questions and a fee-only fiduciary advisor for investment questions.

Numbers and rules in this article change every year — always check the latest from the IRS, CFPB, and your state's consumer protection department.