401(k) vs Limited Purpose FSA
Last updated July 2026
401(k)
The workhorse employer retirement account with high limits and employer match
Advantages
- High contribution limit ($23,000 individual / $30,500 age 50+ in 2026)
- Employer match is effectively free money
- Reduces taxable income now (traditional) or grows tax-free (Roth)
- Auto-enrollment and payroll deductions make consistency easy
- Long-term compounding in a broad investment lineup
Drawbacks
- Only two tax advantages (pre-tax in and tax-deferred growth for traditional; or after-tax in and tax-free growth for Roth)
- Withdrawals in retirement are taxed as income (traditional)
- 10% penalty for early withdrawals before 59½
- Investment lineup limited to employer plan menu
Limited Purpose FSA (LPFSA)
HSA-compatible FSA restricted to dental and vision expenses
Advantages
- Can be used alongside an HSA (unlike standard FSA)
- Pre-tax dollars for dental and vision expenses
- $3,300 annual limit (2026)
- Preserves HSA balance for investment and long-term growth
- Employer may add contribution above employee election
Drawbacks
- Restricted to dental and vision only (not general medical)
- Use it or lose it, most funds expire at year end
- Not portable, lost when you leave employer
- Only available if your employer offers it
401(k) and Limited Purpose FSA both play in tax-advantaged health accounts, but they're aimed at different buyers. 401(k) is built for anyone with employer 401(k) access, especially with employer match. Limited Purpose FSA is built for hSA holders who want pre-tax funding for dental and vision without depleting HSA balance. Which one fits depends on which of those descriptions sounds more like you.
Feature Comparison
| Feature | 401(k) | Limited Purpose FSA (LPFSA) |
|---|---|---|
| Annual Contribution Limit | $23,000 individual / $30,500 age 50+ (2026) | $3,300 individual (2026) |
| Eligible Expenses | -- | Dental and vision expenses only |
| Rollover Rules | Rollover to IRA or new employer 401(k) available | $640 carryover OR 2.5-month grace period |
| Account Ownership | You own it; portable via rollover | Employer-owned; lost when you leave |
| Combinable With Other Accounts | -- | Yes, specifically designed to work with an HSA |
| Tax Advantage | Traditional (pre-tax in) or Roth (tax-free out) | Pre-tax contributions |
| Eligibility | Available at employers offering a 401(k) | Requires employer to offer LPFSA option |
| Withdrawal Rules | 10% penalty before 59½; RMDs starting at 73 | Reimbursement claims for dental and vision only |
| Investing Options | Yes, employer plan investment menu | -- |
| Retirement Use | Full withdrawals in retirement (taxed for traditional) | -- |
401(k) Wins
401(k) takes it overall (9/10 vs 7/10), but Limited Purpose FSA is still the sharper pick for hSA holders who want pre-tax funding for dental and vision without depleting HSA balance.
401(k)'s standout strength: High contribution limit ($23,000 individual / $30,500 age 50+ in 2026). Its biggest drawback (only two tax advantages (pre-tax in and tax-deferred growth for traditional; or after-tax in and tax-free growth for Roth)) is easier to live with than Limited Purpose FSA's (restricted to dental and vision only (not general medical)). Limited Purpose FSA isn't out of the running though — its own standout strength is can be used alongside an HSA (unlike standard FSA). If you fit the profile of hSA holders who want pre-tax funding for dental and vision without depleting HSA balance, that alone can flip the decision.
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