HSA v. FSA account - Which is right for you?
Did you ever think paying medical bills could save you money on taxes? Turns out it can! HSA & FSA accounts are great tools for paying medical expenses AND saving on taxes.
A health savings account (HSA) and a flexible savings account (FSA) are both accounts that help you cover the costs of medical care and have tax advantages.
Both accounts allow you to put money aside to cover medical expenses, like doctor visits, medications or exams and both accounts have some great tax advantages. Money is contributed pre-tax and withdrawn without tax, meaning you lower your annual income taxes by making contributions AND the money you withdraw is tax-free. Pretty great deal!
But there are some key differences between these two accounts.
What is an HSA (health savings account)?
An HSA is an account in which you make contributions to pay for later medical expenses.
Contributions are made pre-tax or are tax deductible, meaning the amount you contribute gives you tax savings. The withdrawals are also tax-free, as long as you are paying for medical expenses. This makes HSA accounts a great tool, because you’re saving for your own medical expenses AND saving money on taxes.
Because of the tax savings, there are contribution limits. In 2024 you can contribute $4,150 for yourself or $8,300 for a family. All of this money can be used for your medical expenses, but if you do not use it, the money will roll over to the next year. The money in your account can be saved or spent, but it never expires.
In addition, many employers will make contributions to your account. The amount they contribute does count towards your limit, but hey free money!
What’s more is the account is 100% yours, meaning you can change employers and the account stays with you. As long as you still have a high deductible plan, you can continue making contributions.
But, what makes an HSA really special is that it’s not a regular savings account. The contributions you make to your HSA can actually be invested, allowing them to grow more rapidly, giving you more money to pay your medical bills.
But there’s an important catch. You are only eligible to open an HSA if you have a high deductible health plan (HDHP).
High deductible plans usually have high out-of-pocket limits for health care, meaning you are responsible for more of the costs of your doctors visits and medications, before the insurance kicks in. Because of this, HSAs/HPHP plans are usually a better fit for younger, healthier people that aren’t making frequent doctor visits or paying for regular medications.
(Side note: you can only contribute to an HSA when you have an HDHP plan, but you can withdraw contributions at any time to pay for medical expenses. In other words, if you have an HSA & HDHP when you are young and healthy, and later switch to a more standard insurance plan, you can still use the money in your HSA. It’s yours forever.)
What is a flexible spending account (FSA)?
An FSA is similar to an HSA, in that money is put aside pre-tax to be used for medical costs, but unlike an HSA it is only available if your employer offers it as a benefit. You cannot open an FSA on your own. This also means that you’ll likely lose your FSA if you change jobs.
Additionally, although some employers contribute to an FSA, most don’t. You’ll be responsible for making the contributions yourself.
The contribution limits for 2024 are $3,200, regardless of whether you are an individual or a family.
Moreover, the account is “pre-funded”, meaning you’ll receive the lump sum in your account at the beginning of the year, but the contributions will be deducted from your paycheck throughout the year. Because of this, you can only make changes to your FSA during the open enrollment period.
Most importantly, the money is use it or lose it (mostly). There can be rollover exceptions, depending on the guidelines your employer chooses, but generally the money expires at the end of the year.
Final Thoughts
HSA & FSA accounts can be great tools to help you pay for medical costs and save money on taxes, BUT it’s important to remember that personal finance is personal. If you have a medical condition that requires regular doctor’s visits and expensive medications, then maybe a high-deductible plan with an HSA isn’t for you.
If you’re healthy and barely go to the doctor, you might not spend the money in your FSA before the end of the year, meaning you’ve lost it.
Like everything else with personal finance, what’s good for someone else may not be the right choice for you. It’s always best to explore your options and run the numbers.
Your life may not be perfect, but it is imperfectly yours. The only way to live it is your way.
