With the open enrollment deadline quickly approaching, we thought you’d appreciate a breakdown on the pros and cons of a health savings account (HSA) and a flexible spending account (FSA). These accounts can be provided by your employer, so you have money to spend on your medical expenses. Although they may have similarities, you want to choose the account that’ll save you the most on your healthcare costs.
So let’s start off by breaking down the HSA and FSA, to better understand them. That way, you’ll be able to comprehend the differences between them to help you choose the right fund for you.
What is the HSA?
Although both the HSA and FSA have contribution limits, the HSA allows more money to be placed into the account. The annual contribution limit for the HSA is $3,350 for a single individual and $6,750 if you have a family.
In order to open up an HSA, you are required to have a high-deductible health plan, which can be purchased through an employer or on your own. Once you have opened up your account, you can save pre-tax dollars through your payroll deductions. These funds are your personal health bank account that’ll pay for your out-of-pocket medical costs for you and your dependents. All of which will be tax free withdrawals as long as it is for medical purposes.
Some of the perks about the HSA is that the funds rollover, so you can invest in future medical needs. Some health savings accounts may build interest in your account over time. Hence, you’re able to utilize the HSA as a type of investment. You can even withdraw your funds from this account tax free once you reach the age of 65, regardless if it is for health care purposes or not.
What is the FSA?
With the FSA, only an employer is able to provide you with the account. Also, the money in these accounts are not actually yours to use until you actually withdraw the money for your medical expenses. Think of it as an interest-free loan that your employer provides, which you pay back over time with your contributions.
The FSA is known as a “use-it-or-lose-it” plan, which means you need to spend these funds by the end of the year or lose it all. Also, if an employer terminates you, your funds will disappear. However, the ACA has created a grace period of up to two and a half months for you to be reimbursed for any money lost due to the annual deadline.
Like the HSA, you are able to deduct pre-tax money from your paycheck to contribute to the account. Also, you are able to withdraw from the account tax free as long as it is for medical reasons. However, the FSA contribution limit is $2,550, which is a lot smaller than the limit within the HSA. That being said, you can spend the full amount within your FSA at any time, as long as your deductibles are used first. You also don’t need to have a high deductible health plan for you to enroll in the fund.
Which One Should You Choose?
Even with a better comprehension of the HSA and FSA, some people are still unsure about which savings account would best fit their situation. Therefore, I have provided a couple of tips to help you decide which account you should use.
If you constantly have medical expenses or very high ones, you should opt for the FSA. That’s because you most likely have a low deductible health insurance policy, which limits you to the FSA only. Also, your funds are immediately available once you enroll, so you have an instant source for your health care expenses.
If you’re healthy or unsure about your total medical expenses, you should utilize the HSA. Healthy individuals tend to have a high deductible health insurance policy, which means they qualify for the HSA.
Also, the healthier you are, the less medical expenses you will have. Hence, you should avoid the FSA since you’re less likely to spend all of the funds within the account. If anything, you can utilize the HSA as an investment account like an IRA, while having the option to use the funds for emergency medical reasons.