Health savings accounts (HSAs) and flexible spending accounts (FSAs) are two common types of tax-advantaged accounts that can be used to pay for medical expenses. While they share some similarities, there are important differences between HSAs and FSAs that you should understand when deciding which option may be better for you.

What is an HSA?

A health savings account (HSA) is a tax-advantaged savings account designed specifically for medical expenses. To be eligible to open an HSA, you must be enrolled in a high-deductible health plan (HDHP). Contributions to an HSA can be made with pre-tax dollars, the funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free.

Some key advantages of HSAs include:

• Contributions are tax-deductible or pre-tax.

• Funds roll over year to year if you don't spend them.

• Once the account reaches a certain balance, you can invest the funds for added growth potential.

• The account is portable—you keep it even if you change employers or health plans. Here's my guide to opening an HSA without an employer.

What is an FSA?

A flexible spending account (FSA) also allows tax-free payment of medical expenses. Unlike an HSA, an FSA is tied to your employer's plan year and you must actively re-enroll each year to contribute. FSA funds do not roll over; you must estimate expenses for the upcoming year and use all contributed funds by the end of the plan year or remaining amounts will be forfeited.

Some potential advantages of an FSA include:

• Access to full annual contribution amount at start of plan year.

• Can be used in conjunction with other types of non-high deductible health plans.

• May include dependent care FSA for childcare expenses.

Key differences between an HSA and an FSA

There are several key differences to consider when deciding between an HSA and FSA:

• Rollover. HSA funds roll over year to year, FSA funds are forfeited if not used by end of plan year.

• Eligibility. HSAs require a high deductible health plan, whereas FSAs can be used with many plan types.

• Contribution Limits. HSAs have higher annual limits on contributions.

• Investing. HSA funds can be invested once the balance reaches a certain threshold.

Tips for using HSA and FSA accounts

If you have the option, here are some tips to make the most of an HSA or FSA account:

• Take advantage of tax-free contributions and withdrawals for medical expenses.

• Determine the right amount to contribute based on predictable expenses.

• Save receipts! You'll need to provide documentation if audited by the IRS.

• Check if your employer offers an HSA or FSA match to increase contributions.

• Use HSA investment options to grow your balance long-term if you don't need the funds immediately.

• Make sure to spend FSA funds by the end of the plan year to avoid losing remaining balances.

As a general rule, healthier and younger people with few prescriptions or medical conditions should opt for an HSA. If you're seeking frequent medical care or paying for regular medications, an FSA might be more suited for you.

As you evaluate your options, compare the key differences between these accounts and consider your expected healthcare expenses, tax situation, employer benefits, and financial priorities. It's worth doing the math. Understanding the unique advantages of an HSA versus FSA will help you decide which approach may be a better fit for your needs.

from LifeHacker https://ift.tt/zojMuAF