It’s tax time, and if you have a health savings account (HSA) or a flexible spending account (FSA), there could be some advantages when you fill out that return. HSAs and FSAs are special accounts that allow you to set aside money pre-tax to pay for your healthcare, but there are some key differences.
Both types of accounts can be used for medical, dental and vision care, including copays, deductibles, prescriptions and over-the-counter items.
“For HSAs, contributions are tax deductible, or pre-tax if made through payroll deductions. Earnings grow tax-free if you invest those earnings,” said Shawn Stack, a policy director with the Healthcare Financial Management Association. “Withdrawals, as well, are tax-free.”
FSAs are exclusively an employment benefit, meaning contributions are deducted pre-tax from your paycheck, but FSAs do not come with investment options, so the benefits are not as significant as they can be with an HSA, according to Stack.
Another significant difference is that FSA money is “use it or lose it.” Anything left at the end of the year is forfeited. And if you move employers, you can’t take FSA dollars with you. HSAs are portable with no time limit to spend the money. Stack recommends contributing the maximum amount to an HSA if possible to maximize the benefits.