The rising cost of health care affects everyone, though there are some ways to mitigate it. These include using either Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs). Both types of accounts allow you to pay for qualified medical expenses in a tax-advantaged manner.
However, there are many differences among these two types of accounts as well. Let’s explore some of the benefits and drawbacks of each.
HSAs: Benefits and Drawbacks
· Tax Savings: Contributions to an HSA are made pre-tax and lower your taxable income for the year. Contributions can grow tax-deferred until withdrawn, and withdrawals made for qualified medical expenses or after age 65 are not taxed.
· Eligibility: You must enroll in a high-deductible health plan (HDHP) before you can be eligible to contribute to an HSA.
· Annual Contribution Limit: For 2021, the contribution limit in an HSA is $3,600 for an individual and $7,200 for a family.
· Rollover of Savings: HSA savings can be rolled over from year to year without requirements to withdraw any of your savings each year.
· Portability: If you leave your employer, you can take the full value of your HSA with you. You can continue to pay for qualified medical expenses from the savings in the account until you have depleted your account.
· Investment Options: An HSA may offer you the ability to invest a portion of your account in different investment options (available through the account administrator) to potentially earn a rate of return on your unused accumulated savings. Note that such investments are usually not FDIC-insured and could lose value.
FSAs: Benefits and Drawbacks
Tax Savings: Like an HSA, contributions to an FSA are made pre-tax and lower your taxable income for the year. Withdrawals made for qualified medical expenses are not taxed. However, unlike an HSA (where accumulated savings are portable), an FSA does not offer a longer-term, tax-advantaged savings vehicle for retirees.
· Eligibility: You can only enroll in an FSA through an employer who offers an FSA as part of their benefits package.
· Annual Contribution Limit: For 2021, the contribution limit in an FSA is $2,750 (the FSA contribution limit does not differentiate between single and family).
· Rollover of Savings: FSAs are “use it or lose it”. You must use your FSA contributions each calendar year by the income tax deadline (typically around April 15th following the previous calendar year). Some employers may allow you to transfer a maximum of $550 from your FSA into the following year.
· Portability: If you leave your employer, you will also lose access to your FSA and any accumulated savings in the account.
· Investment Options: FSAs do not offer any way to earn a rate of return on accumulated savings in the account.
Is an HSA or FSA Better for You?
Every situation is different. HSAs offer more flexibility if you are okay with having a high-deductible health plan. An FSA is more limited than an HSA but is worth considering if your employer offers it as a benefit and your higher medical expenses make an HDHP less attractive.
Modera Wealth Management can assist you in determining if and how you should take advantage of an HSA or FSA for your own personal financial planning needs.
About Us: Modera is proudly a fee-only and independently owned financial planning firm that acts as a fiduciary for our clients. We have built our organization to put our clients’ interests first.
Call Modera Wealth Management in Atlanta, GA to learn more and set up an initial meeting with our team.
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Published by Jacob Wolinsky