What’s the Difference Between an HSA and an FSA?
Two of the most common employer-sponsored healthcare accounts are health savings accounts (HSAs) and flexible spending accounts (FSAs). Both allow you to set aside tax-deferred funds, which you can withdraw tax-free to cover qualified medical expenses.
But which option best fits your specific needs? Discover the key differences between HSAs and FSAs in this week’s Money Wisdom Question Series with Heath Grossman, CFP®.
Rollovers and Balances
HSAs: A major advantage of HSAs is that 100% of your unused funds carry over annually. At the end of a given calendar year, if you don’t use all the funds, they roll over into the next year. Many people strategically save up money in these accounts to use later in retirement for qualified medical expenses.
FSAs: On the other hand, FSAs are set up as a “use-it-or-lose-it” type of account. If you haven’t used the funds by the end of the year, they’re generally no longer accessible. That’s why December is one of the busiest months of the year for FSA spending. Also, if you were to retire or leave your employer, your access to any unspent funds typically ends.
Investments and Tax Treatment
HSAs: Most HSAs allow you to invest excess funds into mutual funds, ETFs, stocks, or bonds. This can be especially beneficial if you’re planning to use those funds in retirement. Another advantage of HSAs is that contributions are generally tax-deductible, lowering your overall taxable income.
FSAs: Unlike HSAs,FSAs do not offer investment options and do not necessarily earn interest. FSA contributions are also not tax-deductible on your income tax return. However, since you make contributions using pretax dollars, they can still lower your taxable income.
Ownership and Eligibility
HSAs: Another important distinction is that an HSA belongs to you, not your employer. If you happen to leave that employer, your money goes with you. However, you must be in a high-deductible health plan to be eligible for HSA contributions. HSA funds also only accumulate as you contribute to them throughout the year.
FSAs: While your employer owns and manages your FSA, you can enroll as long as you’re eligible and your employer’s plan offers the account. Additionally, the money within an FSA is typically available immediately, so you can use it right away.
If you qualify for both an HSA and an FSA, it’s important to carefully weigh your options. The right decision often comes down to your unique financial situation and health history.
