All the Differences Between HSA and FSA

Health savings accounts (HSAs) and flexible spending accounts (FSAs) are two common types of tax-advantaged accounts that can be used to pay for medical expenses. While they have some similarities, there are important differences between an HSA and an FSA that you should understand when deciding which option may be best for you.

What is an HSA?

A Health Savings Account (HSA) is a tax-advantaged savings account designed specifically for medical expenses. To be eligible to open an HSA, you must be enrolled in a high-deductible health plan (HDHP). Contributions to an HSA can be made with pre-tax dollars, funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free.

Some key benefits of an HSA include:

• Contributions are tax deductible or pre-tax.

• Funds flow from year to year if you don’t spend them.

• Once the account reaches a certain balance, you can invest the funds for additional growth potential.

• The account is portable—you keep it even if you change employers or health plans. Here’s my guide to opening an HSA without an employer .

What is FSA?

A flexible spending account (FSA) also allows you to pay for medical expenses tax-free. Unlike an HSA, an FSA is tied to your employer’s plan year, and you must actively re-enroll each year to contribute. FSA funds do not roll over; you must estimate expenses for the coming year and use all funds contributed by the end of the plan year, otherwise the remaining amounts will be forfeited.

Some potential benefits of an FSA include:

• Access to the full annual premium amount at the beginning of the plan year.

• Can be used in conjunction with other types of low deductible health insurance plans.

• May include a dependent care FSA to cover child care costs.

Key Differences Between HSA and FSA

There are a few key differences to consider when choosing between an HSA and an FSA:

• Roll . HSA funds roll over from year to year, FSA funds are forfeited if not used by the end of the plan year.

• Eligibility . An HSA requires a high-deductible health insurance plan, while an FSA can be used with many types of plans.

• Deposit limits . HSAs have higher annual contribution limits.

• Investing . HSA funds can be invested once the balance reaches a certain threshold.

Tips for Using HSA and FSA Accounts

If you have the option, here are some tips for getting the most out of your HSA or FSA account:

• Take advantage of tax-free contributions and withdrawals for medical expenses.

• Determine the correct deposit amount based on projected expenses.

• Save your receipts! You will need to provide documentation in the event of an IRS audit.

• Check to see if your employer offers an HSA or FSA match to increase contributions.

• Use HSA investment options to grow your balance over the long term if you don’t need the funds immediately.

• Be sure to use up your FSA funds before the end of the plan year to avoid losing any remaining balances.

In general, healthier and younger people with few prescriptions or medical conditions should choose an HSA. If you need frequent medical care or pay for regular medications, an FSA may be better suited for you.

As you evaluate your options, compare the key differences between these accounts and consider expected healthcare costs, tax situation, employer benefits and financial priorities. It’s worth doing the math . Understanding the unique benefits of an HSA versus an FSA will help you decide which approach best suits your needs.

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