Background

A client couple engaged our firm for an annual review of their 401(k) and Health Savings Account (HSA) contributions at the start of the year. This review is essential to ensure they are maximizing contributions, properly investing funds, and aligning their accounts with their broader household financial strategy.

Challenges Identified

During our review, we identified three key areas of concern:

Contribution Limits Were Not Updated:
- Both clients’ respective 401(k) and HSA contributions had not been automatically adjusted to reflect the increased IRS limits for the new year.
- This oversight meant they were at risk of under-contributing and missing out on valuable tax advantages and employer-matching contributions.
Uninvested Cash in the HSA:
- The husband’s HSA, which served as the family’s primary account, had accumulated over $20,000 in cash due to the lack of an automated investment program.
- Since HSAs offer tax-free growth for medical expenses, leaving these funds uninvested meant they were missing potential long-term compounding benefits.
Lack of Portfolio Coordination Across Accounts:
- The couple’s 401(k) and HSA investments had not been strategically allocated in the context of their broader household investment portfolio.
- Without proper asset location planning, they were not maximizing the tax efficiency of their accounts.

Our Approach and Solutions

Adjusting Contribution Levels
We helped the couple determine the new maximum contribution limits for both their 401(k) and HSA and then:
- Assisted them in setting the appropriate deduction amounts within their payroll systems.
- We discussed whether it made sense to max out contributions early in the year or spread them out evenly to maintain better cash flow flexibility.
Resolving the HSA Cash Drag
Since the clients intended to use their HSA as a retirement savings vehicle rather than a short-term medical fund, we worked with them to:
- Establish an appropriate cash threshold for medical expenses.
- Set up automatic investing for contributions exceeding this threshold to ensure tax-advantaged growth.
- Allocate the funds within the HSA to asset classes that complemented their overall portfolio strategy.
Optimizing Asset Location Across Accounts
To maximize tax efficiency, we reviewed their overall portfolio and:Allocated higher-growth investments (such as equities) to tax-advantaged accounts like the HSA.
- Ensured that more tax-inefficient assets (such as bonds and REITs) were placed in tax-deferred accounts like their 401(k)s.
- Avoided high-cost actively managed funds that did not align with their long-term investment philosophy.

Outcome

By proactively reviewing their 401(k) and HSA accounts, the clients:

✅ Ensured they maximized contributions for tax benefits.

✅ Invested their HSA funds strategically for long-term growth.

✅ Optimized their portfolio across accounts to reduce tax drag and improve efficiency.

This case highlights the importance of ongoing investment maintenance and the potential hidden inefficiencies that can arise if retirement and savings accounts are left unchecked. A simple annual review prevented costly missed opportunities and aligned their accounts with their financial goals.

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