Benefits enrollment season is here, and with it comes an opportunity for workers to tune up their workplace savings plans and sock away more money on a tax-favored basis. Traditional tax-deferred accounts, like 401(k) plans and individual retirement accounts, are just the beginning for savers. With the proliferation of high-deductible health care plans as employers aim to reduce their costs, more employees are gaining access to health savings accounts – which allow savers to contribute on a pretax or tax-deductible basis, grow on a tax-free basis and permit tax-free withdrawals if they’re for qualified health expenses. In 2023, there were $123 billion in HSA assets held in more than 37 million accounts, reflecting a 19% increase in assets from the prior year, according to Devenir Group . As tempting as it may be for savers to plow money into HSAs and other tax-favored accounts, they’ll need to draw up a strategy before they do so. “HSAs are very underutilized, but they may not be appropriate for everyone and every situation,” said Marguerita Cheng, certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland. Indeed, she noted that a significant medical expense can eat up a sizable chunk of savings in these accounts. Establishing a savings waterfall To ramp up after-tax growth potential, UBS’ Chief Investment Office recommends that investors set up a “savings waterfall” plan. This starts with setting up an emergency fund to cover six to 12 months of expenses, contributing to your 401(k) plan such that you qualify for the company match on savings, and socking away the maximum amount for your health savings account (which in 2025 would be $4,300 for those with self-only coverage or $8,550 for family health plans). After meeting those priorities, UBS found, savers with the means can max out their 401(k) contributions (up to $23,500 in 2025, plus $7,500 in catch-up contributions for those over age 50 – or a new and even higher catch-up contribution of $11,250 for workers aged 60-63). They can also earmark additional funds toward 529 college savings plans and taxable brokerage accounts. Asset location Since these workplace savings accounts have different tax treatments, investors who can allocate toward them can fine-tune the taxes they pay when they draw down from retirement. They can also work with a financial advisor to ensure these accounts are holding the right kinds of assets – which can help enhance after-tax returns. For instance, income-paying assets, such as bonds, might be better held in a tax-deferred account, like a 401(k) or an individual retirement account. Consider that corporate bonds spin off interest that’s taxed at the same rate as ordinary income, which can be as high as 37%. In a tax-deferred account, investors won’t be on the hook for the tax bill until they begin drawing down from it. Stocks and exchange-traded funds that pay qualified dividends could be a good fit in a brokerage account. Qualified dividends are subject to a tax of either 0%, 15% or 20%, depending on an investor’s taxable income. Avoid holding funds that spin out hefty capital gains in this account, though. They can bring unexpected taxable consequences . In a tax-free account like the HSA, investors may be able to take a long-term perspective and invest in high-growth assets. But you’ll want to be sure to have at least enough of your HSA funds held in cash so that you can cover your deductible. Amounts exceeding that can be invested, however. “If you have the dollars, you can have more of a growth orientation,” said Cheng. “You don’t have to keep it in money market funds, but having said that, you can’t forecast whether you get sick or break bones. I wouldn’t put it in something too volatile.”
