Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are two popular tools that can save you so much money. Both accounts let you use pre-tax dollars for qualified medical expenses. But, they work in very different ways. Understanding their key differences will help you choose the right one for your needs and lifestyle.
Let’s break down HSAs and FSAs, explore their benefits and limitations, and determine which option is best for you.
Why do I Need an HSA or FSA?
Life is unpredictable, and medical expenses can arise when you least expect them—whether it’s a surprise trip to the emergency room, an unexpected surgery, or long-term treatments you never anticipated.
Having an HSA or FSA in place isn’t just about saving money; it’s about peace of mind. These accounts ensure you have a financial cushion specifically for health-related costs, so you’re not scrambling to figure out how to pay for care in a moment of crisis.
Imagine the stress of facing a major medical bill without a plan. An HSA or FSA gives you the power to focus on your health or your loved ones’ well-being without worrying about the financial fallout.
Beyond emergencies, these accounts also let you plan for regular expenses like prescriptions, therapy, or dental care—all with tax advantages that keep more money in your pocket.
And as you grow older, an HSA can become a lifeline for rising healthcare costs, giving you control over your future and helping you face life’s uncertainties with confidence. Building this safety net is one of the most empowering financial decisions you can make for yourself and your family.
Pexels // Photo by Cliff Booth
What Is a Health Savings Account (HSA)?
An HSA is a tax-advantaged savings account designed for people with a high-deductible health plan (HDHP). The funds you contribute can be used to cover qualified medical expenses, and any money left over rolls over from year to year.
Key features of an HSA:
- Triple Tax Advantage: Contributions are tax-deductible, the funds grow tax-free, and withdrawals for eligible expenses are tax-free.
- Ownership: The money in your HSA belongs to you, even if you change jobs or leave your health plan.
- Growth Potential: Many HSAs allow you to invest your funds, similar to a retirement account, so your money can grow over time.
What Is a Flexible Spending Account (FSA)?
An FSA is also a tax-advantaged account, but it’s typically offered as part of an employer-sponsored benefits package. It can be used to pay for qualified medical expenses, including copays, prescriptions, and even dependent care in some cases.
Key features of an FSA:
- Use-It-or-Lose-It Rule: FSA funds must be used within the plan year. However, some employers allow a grace period or a small rollover.
- Employer-Sponsored: FSAs are tied to your employer, meaning you lose access to the account if you leave your job.
- Pre-Tax Contributions: Like an HSA, the money you contribute to an FSA is deducted from your paycheck before taxes.
HSA vs. FSA: Summary of Key Differences
How to Decide Which One Is Right for You
Choosing between an HSA and FSA depends on your healthcare needs, financial goals, and type of health plan. Here’s how to evaluate which is best for you:
1. Consider Your Health Plan
If you have a high-deductible health plan (HDHP): An HSA is likely your best option since it’s designed specifically for HDHPs.
If you don’t have an HDHP: An FSA might be your only choice, as HSAs require a specific type of health plan.
2. Think About Your Healthcare Expenses
Predictable Expenses: If you have regular healthcare costs, an FSA might work better. You can plan how much to contribute.
Unpredictable Expenses: If you’re saving for large, unpredictable costs, an HSA is better. It offers more flexibility and long-term benefits.
3. Evaluate Your Saving Goals
Short-Term Use: If you only need funds for immediate or annual expenses, an FSA can cover the basics.
Long-Term Growth: An HSA is ideal for retirement healthcare costs. It has rollover and investment features.
Benefits of Each Option
Why Choose an HSA?
- You want to save for both current and future medical expenses.
- You prefer the flexibility to roll over unused funds each year.
- You’re looking for tax benefits and potential investment growth.
Why Choose an FSA?
- You don’t have an HDHP but still want tax savings on medical expenses.
- You’re confident you can estimate your healthcare costs for the year.
- You need an account that covers dependent care expenses (Dependent Care FSAs are a separate option).
Can You Have Both an HSA and FSA?
In most cases, you cannot have both an HSA and a traditional FSA at the same time. However, there’s an exception. You may be able to pair an HSA with a limited-purpose FSA. The catch is: it can only be used for dental and vision expenses.
When and How You Can Use the Funds
HSA Withdrawals
You can withdraw funds from your HSA at any time to pay for qualified medical expenses, which are outlined by the IRS. These include costs such as doctor visits, prescription medications, surgeries, and even some over-the-counter items like pain relievers and bandages. If you use the funds for eligible expenses, the withdrawal is completely tax-free.
At age 65, you can withdraw HSA funds for any purpose. If it’s not for qualified medical expenses, it will be taxed as income. However, you won’t face a penalty. Before age 65, using your HSA for non-qualified expenses incurs a 20% penalty in addition to income taxes.
FSA Withdrawals
FSA funds are also intended solely for qualified medical expenses. You cannot withdraw funds for non-medical expenses. Any unspent funds usually revert to your employer at year-end, unless a small rollover or grace period applies.
What Are Qualified Medical Expenses?
The IRS has a list of medical expenses that qualify for HSA and FSA reimbursements. Here are examples of common expenses that qualify:
Eligible Expenses
- Doctor and dentist visits
- Prescription medications
- Vision care (e.g., glasses, contacts, eye exams)
- Hearing aids and batteries
- Medical equipment (e.g., crutches, blood pressure monitors)
- Mental health services, including therapy
- Chiropractic care
- Physical therapy
- Prenatal and postnatal care
- Over-the-counter medications (with or without a prescription, depending on the item)
Expenses That Do Not Qualify
While HSAs and FSAs are flexible, certain expenses are not covered. Examples include:
- Cosmetic procedures (e.g., Botox, teeth whitening)
- Gym memberships (unless medically prescribed for a specific condition)
- Vitamins or supplements (unless prescribed by a doctor)
- Non-prescription items like toiletries or sunscreen
Final Thoughts: Which One Should You Choose?
If you have access to both, an HSA is often better. It has long-term benefits, a rollover feature, and tax advantages. However, an FSA can be a great tool for saving on predictable healthcare costs. This is especially true if you don’t have a high-deductible health plan.
The key is to evaluate your healthcare needs, budget, and long-term financial goals. By understanding how these accounts work, you can make an informed decision that supports your health and financial well-being.
