October 2021
Financial Planning

Both a health savings account (HSA) and a flexible spending account (FSA) allow you to pay for medical care with pre-tax dollars, which reduces the cost. With healthcare accounting for 8.1% of Americans' average monthly expenses, these tax shelters are important financial tools.

But while an HSA and FSA sound similar, there are important differences between them.

• HSAs are tax-advantaged accounts either you or an employer can open and contribute to if you have a qualifying high-deductible health plan (HDHP). HSAs allow you to make pre-tax contributions and take tax-free withdrawals to pay for covered care. The money in an HSA can be invested and grow over time and can also be withdrawn after 65 and will be taxed at your ordinary tax rate with no penalties.

• You can also make pre-tax contributions and take tax-free withdrawals from FSAs, but they can only be opened by employers. These accounts serve as a short-term savings account rather than an investment account. You must decide at the start of the year how much to contribute, the money cannot be invested, and it is lost if not used for medical care in the year it is contributed or shortly thereafter.

HSAs provide much more flexibility on how you spend your money, while FSAs allow you to pay for both medical care and dependent care with pre-tax dollars. Here are a list of Pro’s and Con’s to think about before you start saving in one of these vehicles.

And while FSAs offer less flexibility than HSAs, an FSA will still help you save money, and can be paired with any plan — if your employer offers it. Now how much should you begin to save? A good rule of thumb as you begin thinking about how much to contribute: Start with enough to cover your deductible, expected medication costs and anticipated doctor’s visits.

Both a healthcare FSA and an HSA can help you pay out-of-pocket qualified medical expenses. Because your contributions are made on a pretax basis, a healthcare FSA directly reduces your taxable income, as well as the payroll taxes you pay. When you have a high deductible medical plan at work, an HSA can be critical for filling in the expense gap that comes along with it. The funds in an HSA carry over from year to year, are yours if you leave your employer and can be invested. If you have question regarding your benefit options, give us a call at the office and we can determine the best path forward!

If you have questions, please contact us.

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