Health Savings Account vs Flexible Spending Account
Which is better, an FSA (flexible spending account)? Or an HSA (Health savings account)? In this video (episode #358 on the Mullooly Asset you tube channel), Tom breaks down some of the basic differences between a health savings account and a flexible spending plan.
The main difference between the two plans is a flexible spending plan is essentially a “use it, or lose it” plan. While a small portion may get carried over in to the following year, participants in an FSA must use the money in this account each year or forfeit the balance.
An HSA (health savings account) does not have the “use it, or lose it” feature. Money can be saved in the plan and the balance can build over many years. This can develop into an additional savings plan for individuals. Just be sure not to make this your “primary” savings / emergency fund. Casey wrote more about HSA plans here.
As these plans become more and more available, and more commonplace, folks use these terms “health savings account” and “flexible spending account” interchangeably. But you need to know there are several differences between an HSA and an FSA!
Links for Health Savings Account vs Flexible Spending Account
Catch all our Mullooly Asset Management videos right here
IRS website discussing the Health Savings Account
Investopedia page discussing a Health Savings Account
Fidelity – what is an HSA?
Health Savings Account vs Flexible Spending Account Transcript
In this video we’re going to talk about the differences between a flexible spending account and a health savings account
You’re not going to want to miss this.
We get a lot of questions about health savings accounts and flexible spending accounts. Let’s talk about them because they are NOT the same, they’re definitely not equal.
Employer plans will often offer a flexible spending account — sometimes referred to as FSA.
What does this mean?
You’re permitted in flexible spending accounts to put away money, throughout the year, into an account that you can use, without taxes.
So the money goes in pre-tax.
And if you use it for medical related expenses, you are not taxed on this money.
You can use money in your flexible spending account for:
deductibles,
copays,
coinsurance.
Really – the only thing money-related you can’t use it for — is to pay the premiums.
But you can also use it for some prescriptions.
You can use it for dental and vision care.
There’s a running joke that if you didn’t use your flexible spending account — in December, you’re getting a new pair of glasses!
You don’t pay tax on what goes in, it goes in pre tax.
How much are we talking about?
In 2023, you can put away $3,850 as an individual.
You can put almost double that – a little more – $7,750, for families.
Now there’s also another feature about flexible spending accounts – that you may not know – but they may have a “dependent care flexible spending account.”
That allows you to put away up to $5,000 for dependent care.
Do you need to put a child into day care?
Here’s five grand, to help along with the cost.
It’s something worth taking a look at. But the main thing you’ve got to remember — if you remember nothing else — the FSA is “use it – or lose it.”
Yes, a small portion may get rolled over from year to year. But the basic concept with the FSA, flexible spending account, is you HAVE to use it in the calendar year, or it’s gone.
It will not get carried over.
The flip side of that is an HSA, health savings account.
Now to have a shot at a health savings account you need to be enrolled in what’s called a “high deductible health care plan.”
And that might turn some people off. Because even with a high deductible health care plan – you might have a lower monthly premium, that comes out of your paycheck. But a high deductible means you’re on the hook – for the first $5,000 or $7,000 or $8,000 dollars — that is on you! You’ve got to pay.
But having the option to have a health savings account might be worth it.
Let’s dig in a little bit.
The balance in your health savings account – if you don’t use it – just gets rolled over every year into the future.
If you don’t ever tap into this money, just imagine how this can really add up after a few years.
It essentially becomes a form of savings for you, if you’re not tapping in to it.
Contributions go into a health savings account – tax free. They’re all pre tax.
Any earnings that take place inside the account – also tax free.
Any withdrawals that you make – if they’re for medical related expenses – also tax free.
Imagine someone who may not be in the best of health. Now there is a way to set aside money – on a pre tax basis – to cover some of those out of pocket expenses that you are normally the hook for — like your deductible, your co pays, or some of the things that aren’t covered by insurance.
But — also imagine — you’re in pretty good health. You don’t need a lot of medical care. This is a way to sock away some money – every year and just let it compound out into the future.
It’s something worth considering.
There are some penalties that you need to know about. And my basic conversation with folks is — if you need to take money out — please don’t!
Just don’t!
Because it’s going to be very costly.
If you take money out of your HSA, and it’s for not for a medical expense, AND you’re under age 65; it’s going to be taxable income PLUS a twenty percent penalty.
It’s bad. It’s pretty steep.
If you’re over age 65, you still want to take money out — it’s not for something medical related — you’re just gonna pay the income tax; the penalty goes away.
So you have to know yourself.
This is a great way to put money away – but it shouldn’t be considered your emergency savings account. You can’t go running back to this, whenever you have something wrong.
So what can you put in?
In 2023, you can contribute up to $3,850 as individual. If you’re contributing for a family, $7,750.
Next year those numbers go up.
In 2024, individuals can contribute $4,150. If you’re contributing for a family, $8,300. can go into these plans.
This is actually something that’s getting people’s attention!
Oh by the way, if you’re age 55+, you can contribute …just tack on an extra $1,000 on top of those numbers. This is actually getting people’s attention! And worth taking a look at.
I would look for an HSA bank. You can go online and do a search for them. Some of these banks offer “self directed brokerage accounts,” so there could be an opportunity for some nice growth.
That is the message for episode three fifty eight – thanks, as always, for tuning in!
