How to Choose Which Is Right for You
Both health savings accounts (HSAs) and flexible spending accounts (FSAs) provide a tax-advantaged way to save for qualified medical expenses, but there are big differences between the two. How do you know which type of account is best for your particular situation? Read on to learn more.
HSAs vs. FSAs
HSAs and FSAs are similar in several ways:
- Both HSAs and FSAs allow individuals to set aside pre-tax money to cover future healthcare expenses.
- The funds from both types of accounts can later be withdrawn free of federal income tax to pay for qualified healthcare costs, such as medical, vision and dental care; prescriptions drugs; over-the-counter medications; etc.
- Both HSAs and FSAs are typically offered by employers as part of their employee medical benefits.
There are also several key differences between the two account types:
| HSAs | FSAs | |
|---|---|---|
| Eligibility | Only those with a high-deductible health insurance plan as primary insurance may contribute. | Available as an optional benefit through workplace benefit plans. If offered by your employer, you must enroll during the annual open enrollment period. |
| Contribution limits | $4,150 per individual, $8,300 per family, $1,000 catch-up contribution for those age 55 and older (2024) | $3,200 per individual |
| Rollover rules | Contributions can be rolled over from one year to the next, and there’s no deadline for withdrawing assets. This makes HSAs a good way to save for healthcare expenses in retirement. | “Use it or lose it.” Employers may allow up to $640 to be carried over to the next plan year. Any unspent funds exceeding that amount are forfeited at the end of the year. |
| Portability | HSA assets are owned by you, which means you can bring them with you when you change employers. You can also transfer or roll over your HSA funds to another HSA provider. | FSA assets are owned by your employer. If you change employers, you may forfeit any leftover funds. |
| Withdrawal rules | Can only withdraw assets currently held in the account. | Can access the full amount of your annual contribution to the plan, even if you haven’t made a full year’s worth of contributions. |
| Savings term | Can be used as a long-term savings vehicle because contributions can be rolled over from one year to the next with no withdrawal deadlines. | Is a short-term savings vehicle, as funds must be paid out during the year in which contributions were made. |
How to Choose
If you’re eligible for both an HSA and FSA, the best choice for you depends largely on your healthcare needs and savings objectives. If you anticipate lower healthcare expenses in the current year and wish to save for future expenses, an HSA may be the right choice. On the other hand, if you wish to offset large medical expenses early in a given year, FSA savings may be a better option.
If you don’t have access to both an HSA and an FSA through your employer benefits (either because your employer doesn’t offer both options or because you don’t participate in a high-deductible plan), save in whatever account you can. Both options are a great way to set aside tax-advantaged funds to cover qualified medical expenses.
Could you use some help evaluating your healthcare savings options? Creative Planning is here for you. Our experienced teams work together to help ensure your financial life is optimized and working to achieve your personal financial goals. For more information, schedule a call with a member of our team. We look forward to getting to know you.
