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How much should I deduct for 401K, HSA, and FSA during recession?

December 24th, 2008 · No Comments

It’s open enrollment period at my company now. I need to decide how much I’m going to deduct from my paychecks in 2009 for 401K, Health Saving Account (HSA), and Flexible Spending Account (FSA).

In the past, I have always maxed out 401K deduction to take advantage of the tax saving benefit. I’ve also put some money into Flexible Spending Account since we have a young family with regular medical expenses.

Health Saving Account (HSA) is new to me this year. The premium for our PPO health plan will increase by 200% next year (i.e. the company is cutting employee health care significantly in order to save money), so I really have no choice but sign up for the HSA medical plan. I know many employers are moving to HSA plans. In case you’re in the same boat and try to figure out how exactly HSA works and how HSA is different from Flexible Spending Account (FSA), I’d recommend the following two excellent articles:

What’s the difference: Health Saving Account vs. Flexible Spending Account:
How Medical Savings Account and Health Saving Account work

Here is what I’ve decided:

  • I still plan to max out our 401K deduction in 2009. 
  • I will also max out HSA deduction in 2009 as well because 1) with two young kids and some dental work I planned for next year, we’ll have a sizable medical bill 2) tax benefits 3) I can always use my HSA money in the future if I have money left unspent in my HSA account in 2009. If I change jobs in the future or start my own company, I might no even have a HSA account. I want to take advantage of this opportunity to get some tax benefit.
  • But, I’ll only deduct a small amount in the first half of 2009. One huge benefit of 401K and HSA deduction is that you can change the amount of deduction at any time during your benefit year. Given the current economic situation, there is a lot of uncertainties. I want to conserve as much cash as possible, and wait and see how the economy goes in first half of 2009. If things become much worse (e.g. I lose my job), I could choose not to put any money into 401K or HSA at all. By having small deductions upfront, I’ll give myself more flexibilities down the road.

The next question is how to invest the 401K money. I took out all of my 401K money from stock funds and put them into money market funds in Summer, 2008. I was lucky that my 401K portfolio didn’t have a big drop in 2008. I still think that the stock market has not reached the bottom yet. I’ll continue to hold most of my 401K money in money market funds for the foreseeable future.

Disclaimer: I’m not a financial professional. So, if you’re looking for advice on how to invest your 401K money, consult a financial professionals.

Tags: 401K and Money Market · Beat Recession

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