401k: Roth vs. Traditional

One of the more interesting questions that has cropped up recently is whether the Roth or traditional 401(k) is the superior savings vehicle. Most people know that if you expect your tax rate to increase in retirement, a Roth is better, and a Traditional 401(k) is better in the case you believe it will decrease. I would like to show you some of the considerations where this may not be the whole story. I am not a financial planner; I just like to think through these sorts of decisions on my own. The following is my judgment of the situation, and you should discuss your own situation with a financial planner. Hopefully you can use this information for your own purposes. Also, if the middle is too dry, skip to the end. Enjoy!

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Health Savings Account Arbitrage

The Health Savings Account, or HSA was introduced in 2003 and has revealed itself to be a solid choice in saving money on health insurance. Beyond the obvious saving advantage that comes from empowering consumers to pay for most of their everyday medical expenses, the HSA also has a hefty tax benefit. HSAs are free from federal tax when accumulating, compounding and distributing money (although some states, like California do tax it). Of course, the tax benefit is only when using the HSA for qualified medical expenses. After the beneficiary turns 65, non-qualified distributions are taxed at the normal tax rate, just like a traditional 401(k) or IRA.

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