What is HSA and FSA: What’s the difference? And how to choose?

savings account
You can use your FSA and HSA pre-tax or tax-deductible funds for thousands of eligible purchases.

June 15, 2022 –Hispanic Solutions Group

What is an FSA account?

A flexible spending account is a single savings account that you can contribute to. Later, you can use it to cover certain designated health care costs that you pay out of pocket. The money you contribute to your FSA is not taxable. When you pay your health care costs through an FSA, you save the equivalent amount of taxes you would have paid on FSA contributions.

What is an HSA account?

A health savings account is similar to a personal savings account. The difference is that the money paid into the HSA is intended to pay for health care expenses. With an HSA, you are its owner, not your employer or any other entity. This gives you more control of contributed funds compared to an FSA. Like an FSA, one benefit of an HSA is that the funds deposited into the account are not taxed. It’s also worth noting that you probably won’t be able to have both types of accounts unless your FSA is a limited purpose FSA. This is an important thing to discuss with your employer, as eligibility will vary from case to case, experts say, when it comes to savings.

If you’re eligible for an FSA or HSA, you should take full advantage of each respective plan’s offering. The main benefit of both is that you can save on taxes if you choose to put part of your pay into one of these tax-advantaged accounts.

Should you choose an FSA or an HSA?

Remember that flexibility is a key feature of an HSA. In general, you can contribute a larger amount to an HSA each year and still retain the ability to reinvest any unused balance at the end of the year. So if you’re looking for greater flexibility along with tax-free benefits and portability for your investment, an HSA may be the best option.

However, there is a trade-off to these HSA benefits. To participate in an HSA, you’ll need to enroll in a high-deductible health care plan, which typically results in larger and often very high out-of-pocket health care costs, along with the higher deductible.

While a high-deductible plan may be the right choice for younger, healthier people, as well as those with higher and growing incomes and savings, it may not be best for everyone. For seniors on more fixed incomes or those with health issues that may require frequent doctor visits, a more predictable and less expensive (but also less flexible) FSA might be the right choice.

What is considered a qualified medical expense?

You can use your FSA and HSA pre-tax or tax-deductible funds for thousands of eligible purchases, but before you spend, be sure to check to see if it’s an approved expense.

A good rule of thumb to determine if it is a qualified expense is if it can be considered medically necessary. The IRS tax code refers to the term health care; as amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body.

Here’s an overview of some popular expenses that typically qualify:

  • Medical copays and coinsurance
  • Dental care costs (i.e. dentures)
  • Vision care costs (i.e. eye exam, glasses)
  • Prescription drugs and over-the-counter treatments
  • In addition, HSA funds can be used for insurance premiums after taxes.

Here the expenses that do not normally qualify as eligible medical expenses include:

  • Cosmetic or cosmetic surgery
  • exercise equipment
  • home help
  • funeral expenses
  • Fitness programs (i.e. gym memberships)

How much do you want to contribute?

Once you’ve decided which account to go with, the next step is to decide how much you want to contribute.

One key to consider is the rollover rules for each account type: FSA funds are used or lost, while HSA funds can be rolled over to the next year, experts say.

If you choose to go the HSA account route, it is recommended that you contribute the maximum amount each year due to its flexibility.

“Unlike FSA, where you must exhaust your contributions annually, HSA money can be invested to grow and grow. This is similar to a traditional IRA. says Barbara A. Friedberg, financial expert.

If you can invest your HSA contributions, you may be able to increase them free of taxes, which will ultimately lead to a higher HSA balance, as your contributions will have grown tax-free over time.

When you need the funds, you can easily withdraw them, but if you’re lucky and don’t use them

everyone before the age of 65, you can withdraw the money without penalties and use it for anything and just pay. income tax, which makes it a nice asset to your retirement savings strategy, says Friedberg.

As for FSA contributions, expert Lauren Anastasio suggests that

Consider a strategic spending account.

“While there is a small amount that may be eligible to roll over each year, an FSA should only be funded with the amount you expect to spend during the plan year,” he says.

Lauren Anastasius. If you consistently meet your deductible or have a planned medical expense like surgery or pregnancy, funding your FSA with the amount to cover your deductible would be a great start.

what you should know

Finally. – Flexible spending accounts and health savings accounts are strong options if you qualify. By contributing to these tax-advantaged accounts, you could reduce your income taxes while having funds available for important health expenses.

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