FSA or HSA: Which Offers the Best Tax Advantages?

Health Care 0318-Blog

Flexible Saving Accounts (FSA) and Health Savings Accounts (HSA) can be used to pay for qualifying out-of-pocket expenses with tax-free dollars. But the IRS rules governing these accounts differ significantly. For example, FSA funds must be spent each year or you lose the money, while funds in a HSA rollover from year to year. Consider these factors when weighing your options.

Flexible Savings Accounts

If you have work-based coverage, you can use a FSA to pay for deductibles, copayments, some medications, certain medical equipment and other health care costs. You don’t pay taxes on FSA contributions, which are limited to $2,550. Employers can (but are not required) to contribute to your FSA.

Under IRS rules, FSA funds must be spent by a certain date or you forfeit the money. Employers, however, have the option to allow a $500 rollover to the next year. So before choosing a FSA, carefully review your medical needs and potential or planned costs for a given year.

Health Savings Accounts

To open a HSA, you must be under age 65 and have a plan with a high deductible of at least $1,300 for an individual and $2,600 for a family. HSA contributions and accrued interest are tax-free. The maximum contribution is $3,350 for individuals and $6,750 for families. If you are 55 or older, you can contribute an extra $1,000. The account belongs to you, whether you open a HSA on your own or through work.

Unlike a FSA, unspent funds can remain in a HSA from one year to another. Once you reach retirement age, a HSA converts to a typical individual retirement account. HSA funds can pay for deductibles, copayments and other health care costs. But if the money goes toward non-medical expenses, you must pay an income tax and a 20% penalty.

Make sure to take these factors into consideration when weighing out your options.

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