HSA vs. FSA: Understanding the Differences and Choosing the Right One

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HSA vs. FSA: Understanding the Differences and Choosing the Right One

When it comes to saving money on healthcare costs, two common options are Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). While they might seem similar at first, they have important differences that can affect how and when you use the money. Understanding these differences can help you choose the best option for your needs.

What Is an HSA?

A Health Savings Account (HSA) is a special type of savings account that allows you to set aside pre-tax money for medical expenses. To qualify for an HSA, you must be enrolled in a High Deductible Health Plan (HDHP). The money in your HSA can be used for things like doctor visits, prescriptions, and other eligible medical expenses.

Key Features of an HSA:

• You must have an HDHP. Only people enrolled in a high-deductible health insurance plan can open an HSA.
• The money rolls over. If you don’t use all of the money in your HSA by the end of the year, it stays in your account and continues to grow.
• It earns interest and can be invested. Some HSAs allow you to invest your balance, similar to a retirement account, helping your money grow over time.
• It’s yours forever. Even if you change jobs or retire, your HSA stays with you.
• Triple tax benefits. Contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are also tax-free.

What Is an FSA?

A Flexible Spending Account (FSA) is also a way to set aside pre-tax money for medical expenses, but it works differently from an HSA. FSAs are offered by employers, and they allow you to use the money for eligible healthcare expenses throughout the year.

Key Features of an FSA:

• No HDHP required. You don’t need to have a high-deductible health plan to qualify.
• Use it or lose it. Most FSAs require you to use the money within the same plan year, though some employers offer a short grace period or allow you to roll over a small amount.
• No investment options. The money in an FSA does not earn interest or grow over time.
• It’s tied to your employer. If you leave your job, you lose access to your FSA funds unless you have expenses to submit before your last day.
• Immediate access to full funds. Unlike an HSA, where you contribute money throughout the year, an FSA gives you access to the full amount you elect to set aside from day one of the plan year.

HSA vs. FSA: A Side-by-Side Comparison

Which One Should You Choose?

The right choice depends on your situation. Here are a few factors to consider:

• If you have a high-deductible health plan, an HSA is a great option because of its long-term benefits, ability to roll over funds, and potential for investment growth.
• If your employer offers an FSA and you expect medical expenses, an FSA can help you save on taxes and cover costs, but you’ll need to plan carefully to avoid losing unused funds.
• If you change jobs often, an HSA is better because it stays with you, while an FSA is tied to your employer.
• If you want long-term savings for medical expenses, an HSA is the better choice due to its ability to grow and roll over.
• If you expect to spend most of the money within a year, an FSA can still be useful, especially since the full amount is available upfront.

Can You Have Both?

In some cases, you can have both an HSA and an FSA, but only if your FSA is a limited-purpose FSA. This type of FSA is specifically for dental and vision expenses and doesn’t interfere with your HSA eligibility.

Bottom Line

Both HSAs and FSAs offer valuable ways to save money on healthcare expenses, but they serve different needs. If you’re looking for a flexible, long-term savings option with tax benefits, an HSA is the better choice. If you prefer a short-term way to cover predictable medical costs, an FSA can work well.

Before enrolling in either account, review your health insurance plan, expected medical expenses, and financial goals to make the best decision for you and your family.

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge, a Registered Investment Advisor. Sound Foundation Wealth Advisors and Cambridge Investment Research, Inc. are not affiliated.