FSAs vs. HSAs: Understanding the benefits of both
When it comes to managing healthcare expenses, flexible spending accounts (FSAs) and health savings accounts (HSAs) are two popular options. Both offer tax advantages and can help you save money on medical costs, but each has its own distinct features and benefits. Let’s dive into the details of each type of account to help you decide which might be the best fit for you.
What are FSAs and HSAs?
A flexible spending account, or FSA, is a tax-advantaged account offered by employers that allows you to set aside pre-tax dollars for eligible medical expenses. Contributions to an FSA are deducted from your paycheck before taxes, reducing your taxable income.
A health savings account, or HSA (Member FDIC), is an account that is only available to individuals enrolled in a high-deductible health plan (HDHP). HSAs allow you to save pre-tax dollars for qualified medical expenses. Additionally, those with an HSA may choose to invest their account balance for potential growth.*
To show the unique benefits each account offers, as well as some things to keep in mind, we’ve made a handy chart for easy comparison:
Consideration |
FSAs |
HSAs |
| Tax advantages |
Tax savings: Contributions are made pre-tax, which lowers your taxable income and can save you money on federal income taxes. Additionally, qualified expenses paid with FSA funds are not taxed.
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Triple tax advantage: Contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.
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| Access to funds |
Immediate access to funds: You have access to the full annual contribution amount from the beginning of the plan year, even if you haven’t fully funded the account yet. A caveat: FSA funds are use-it-or-lose-it and typically do not roll over to the next year. Some employers may offer a grace period or allow a specific carryover amount.
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Rollover funds: Unused funds roll over year to year, allowing you to build savings for future medical expenses.
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| Convenience |
Broad coverage: FSAs can be used for a wide range of medical, dental, and vision expenses, including co-pays, prescription medications, and over-the-counter items.
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Portability: HSAs are not tied to your employer, so you can keep and continue to use your HSA even if you change jobs.
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| Investment opportunities* | N/A |
HSA funds can be invested in stocks, bonds, and mutual funds, potentially growing your savings over time.*
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| Eligibility |
Employer-dependent: FSAs are tied to your employer, so if you change jobs, you may lose access to your FSA funds.
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HDHP requirement: You must be enrolled in a qualified high-deductible health plan to contribute to an HSA. HDHPs often come with higher out-of-pocket costs before insurance coverage kicks in.
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So, how do you know which is right for you?
Choosing between an FSA and an HSA depends on your current coverage options, individual healthcare needs, and financial situation. If you prefer immediate access to funds and have predictable annual medical expenses, an FSA might be a good choice. On the other hand, if you want to save for future medical costs and take advantage of investment opportunities, an HSA could be more beneficial.
Additionally, it is possible to use both types of accounts in tandem — technically. If you have a Limited Purpose FSA (LPFSA) or a Dependent Care FSA (DCFSA), you can also have an HSA. This is not considered double-dipping since these accounts have limited, specific purposes, with the LPFSA covering dental and vision care and the DCFSA covering dependents.
Both FSAs and HSAs offer valuable tax advantages and can help you manage healthcare expenses more effectively. Consider your healthcare needs, financial goals, and eligibility requirements when making your decision.
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