Confused about the difference between an HSA (Health Savings Account) and an FSA (Flexible Spending Account)? Both can be used for medical and dental expenses but have some key differences that are important to know.
It’s also important to note:
Eligibility:
- HSA: You must have a high-deductible health plan (HDHP) to qualify.
- FSA: You don’t need a specific health plan, but self-employed individuals can’t have an FSA.
Withdrawals:
- HSA: You can withdraw funds for non-qualifying medical expenses, but you’ll pay taxes and penalties.
- FSA: You can’t withdraw funds for non-qualifying expenses.
Contribution Limits:
- HSA: Often has higher contribution limits than FSAs.
Death Benefits:
- HSA: Your spouse inherits it with the same benefits. Other heirs will inherit it as ordinary income.
- FSA: Benefits typically disappear upon death.
As JL Collins points out in his book, The Simple Path to Wealth, there are some additional key points to take into consideration:
- You are not required to pay for your medical bills with your HSA.
- If you pay your medical bills out of pocket, you can let your HSA grow.
- As long as you save your medical receipts, you can withdraw money from your HSA tax and penalty-free at any time to recover them. Even years later.
- Those who plan to use the money to pay current medical bills are best served by keeping it in an FDIC-insured savings account.
- However, you can invest your HSA anywhere, such as an index fund.
- Once you reach the age of 65, you can withdraw your HSA for any purpose penalty-free. However, you will owe taxes on the withdrawal unless you use it for medical purposes.
Use your FSA wisely: If you have a use-it-or-lose-it FSA, consider spending it on:
- Doctor’s visits
- Telehealth visits
- Over-the-counter medications
- Dental care (covers dental cleanings, root canals, and orthodontics).
- Vision care (covers contacts, optometry visits, eyeglasses, LASIK, and more.
- Hearing care (covers hearing aids, cleaners, and wax removers)
- Diabetes management
- Breathing care (covers air filters and air purifiers)
- Eczema cream and lotion
- Women’s healthcare products
- Fertility treatment
- Baby products
- Gear for nursing moms
- Vasectomy
- Hearing aids
- Smoking cessation
- First-aid
- Medical masks
- Amazon has an FSA store where you can browse products that are FSA-eligible.
As always, make sure your documentation contains the following:
- Patient name
- Provider name
- Date of service
- Type of service
- Cost
With open enrollment season upon us, this is a great time to review your benefits to make sure you’re taking advantage of the plans that are going to benefit you the most.
I hope this helps!
