hsa vs fsa which one is better for you

HAS vs FSA Account: which is better, Pros and Cons

There are a lot of tax advantage accounts that help us save money, but only a few would help us to cover our healthcare costs. Here, we will discuss everything about such tax advantage accounts that not only help us save for healthcare costs but will also save our money from taxes. Such two accounts are HSA vs FSA. But which one to choose? Is there any difference between an HSA and FSA account? We have covered everything you must know.

Key Highlights

  • If your FSA account is established by your employer, he owns it. You will also forfeit your FSA funds if you separate from your employment.
  • If you are healthier, younger, and have few prescriptions or medical conditions, you would better go for a HSA.
  • The funds in health savings accounts roll over from year to year.
  • The funds in your FSA accounts cannot be invested and are held in non-interest-bearing accounts.

What are HSA and FSA Accounts? 

  1. FSA or flexible spending account 

It is a kind of tax-saving tool where you pay for qualified out-of-pocket healthcare expenses. It is established by your employer where you put your money away from yourself, your spouse, or other dependents. As the FSA account is established by your employer, he owns the account, and if in case you separate from your employment, you would also forfeit your FSA funds. The contribution limit for the FSA account is $2,854 for health FSA and $5,000 for dependent care FSA. 

  1. HSA or health savings account

A Health Savings Account also helps you put some money into a pre-tax account, but unlike an FSA, you need to qualify and meet certain requirements to contribute to an HSA.

  • You cannot claim as a dependent on anyone else tax return.
  • You do not enroll in Medicare
  • You are not covered under a high-deductible health plan.

An HSA contribution limit is $3,654 for self-only and $7,300 for family coverage. The best parties are you, the sole owner of your health savings account.

Is it better to have an HSA or FSA?

When it comes to HSA vs FSA, which is better, the definite answer is that both accounts have their benefit that helps you manage your out-of-pocket medical expenses throughout the year.

If you are healthier and younger and have few prescriptions or medical conditions, you would better go for an HSA account as they do not need you to see frequent medical care or pay for regular medication. Even though HDHP is one of the cheapest health plans available for you, the trade has high out-of-pocket limits of as much as $15,000 for a family in 2023. It means if you have high medical costs, you still need to pay a significant amount out of pocket even after your HSA contributes the maximum.

On the other hand, if you look for FSA, it is deducted from your gross pay to fund your FSA account, and once the declaration is made, you can't change it for the entire year. Moreover, if you do not spend your declared funds within the next year, the money you contribute will be lost 

Pros and Cons of HSA and FSA Account 

Pros and Cons of HSA

  1. Pros of HSA Account

Contribution can be invested

When you make contributions to your health savings accounts, you also invest in various financial instruments like stock bonds, Mutual funds, or other assets. This helps your HSA funds to grow over time, which provides investment opportunities apart from covering future healthcare expenses.

Account funds are not “used it or lose it”

Unlike the flexible spending accounts, the funds in health savings accounts roll over from year to year. It means if you have any unspent funds remaining in your account, it will continue to grow tax-free until you use them for qualified medical expenses.

You decide how much to contribute.

An HSA account offers the flexibility of contributing the amount according to your needs. You can contribute as much as you want up to the IRS's annual contribution limit. This flexibility helps you make contributions according to your healthcare needs and financial situation.

You can withdraw your money for any purpose without penalty after 65

Similar to another retirement account, when you reach 65, you can withdraw your funds from health savings accounts for any purpose without incurring any penalty. Withdrawals for non-medical expenses are subject to income tax rebates. This flexibility offers you the benefit of providing financial security during retirement.

  1. Cons of HSA

HDHP determines your eligibility

Health saving accounts are tied to a high-deductible health plan (HDHP), which means you can only establish your health saving account if you enroll in a qualifying HDHP. HDHPs offer lower premiums but also higher deductibles and out-of-pocket expenses, which might not suit your healthcare needs.

You can access your funds only after they have been contributed

Unlike a flexible spending account, you can only access your HSA funds after contributing to it. You must have sufficient funds to cover medical expenses upfront before using your HSA funds.

Pros and cons of FSA

  1. Pros of FSA

You don't need to qualify for HDHP

Unlike health saving accounts tied to high deductible health plans, flexible spending accounts don't need you to be eligible for HDHP to contribute. You can contribute to FSA even if you are not enrolled in any specific health insurance plan.

You can put away pretext money for your dependent care, too

FSA accounts offer the flexibility to use your pretext money for different eligible expenses and not just health care. Moreover, apart from healthcare expenses, you can also use FSC funds to cover dependent care expenses like child care or elder care. 

You can immediately access your FSA funds.

FSA accounts provide immediate access to the total funds you have contributed for the year. You can use your FSA funds to cover eligible expenses without waiting for contributions to accumulate. This flexibility helps you manage unexpected or ongoing healthcare throughout the year.

  1. Cons of FSA

It comes with the use it or lose it rule.

The significant drop in the FSA account is the use-it-or-lose-it rule, meaning any funds you contribute to your FSA must be used within the plan year or the grace period if offered. If you don't use the funds by the end of the year or Grace period, you could forfeit the contributed funds, a significant loss of money.

FSA can only be used for medical expenses

Unless health savings accounts offer flexibility regarding eligible expenses, FSAs have limited qualified medical expenses. This means FSAs would cover healthcare costs like doctor visits, prescription medications, and certain medical supplies but may not cover all essential healthcare needs or costs.

You cannot invest your FSA funds.

The funds in your FSA accounts cannot be invested and are held in non-interest-bearing accounts, which means you miss the potential of growing the money you are offered in your health savings account.

Key Difference between HSA or FSA Account 

Choosing Between HSA and FSA

Can I have both HSA and FSA? 

When you are offered health saving and flexible saving accounts, you might wonder if it is possible to have both accounts simultaneously.

You may be able to have FSA and HSA at the same time, depending on which type of flexible savings account you have.

There are three types of flexible saving accounts

  • Healthcare FSA: which can be used for out-of-pocket healthcare expenses.
  • Limited purpose FSA: which only covers out-of-pocket dental and vision expenses.
  • Dependent care FSA: which pays for the care of dependents, like children under 13, children with disabilities, and elderly parents.

If you have a healthcare FSA, you can't have an HSA simultaneously, as both are used to pay for the same type of expenses. However, if you have a limited purpose and dependent care FSA, you can have HAS, as they fulfill different purposes.

Conclusion

Healthcare FSA and HSA help you pay qualified out-of-pocket medical expenses. However, while determining the differences between HSA and FSA accounts, you might wonder which is better. Both are created to fulfill specific purposes, but when it comes to HSA vs FSA, it is better to determine keeping in mind the pros and cons of each. When you have a high deductible medical plan, HSA can be helpful. On the other hand, FSA directly reduces your taxable income. Hence, choose, keeping in mind your needs and purposes.

FAQs

What are the tax benefits of HSA and FSA?

When you contribute to an HSA account, they are tax deductible and grow tax-free, moreover, the withdrawals you make for qualified medical expenses are also tax-free. On the other hand, contributions to FSA are made on a pre-tax basis, which reduces your taxable income, and if you withdraw for eligible expenses, they are also tax-free.

Who is eligible to open an HSA or FSA?

To be eligible for an HSA account, you must be enrolled in a high-deductible health plan. FSA is offered by employers as a part of their benefits package, and the eligibility might depend on the employer's plan.

What expenses are paid for with HSA or FSA funds?

HSA funds can be used for qualified medical expenses defined by Internal Revenue Services, including doctors' visits, prescriptions, medications, and certain medical supplies. On the other hand, FSA can also be used for qualified medical expenses but offer additional eligible expenses like dental and vision care dependent care expenses and over-the-counter medications.

Can I invest in my FSA fund?

Funds in FSA accounts are typically held in non-interest-bearing accounts and cannot be invested

Read Also:

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Win Harrison 01 Aug, 2023

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