How Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) Can Save You Money

Healthcare expenses can add up quickly, but smart financial tools like Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) can help you save money. These accounts offer tax advantages that reduce your taxable income while helping you cover medical costs. Understanding how HSAs and FSAs work, their benefits, and how to use them effectively can lead to significant savings.

What is a Health Savings Account (HSA)?

An HSA is a tax-advantaged savings account designed for individuals with a high-deductible health plan (HDHP). It allows you to save money specifically for medical expenses while enjoying three key tax benefits.

• Pre-Tax Contributions: Money you contribute to an HSA is tax-deductible, reducing your taxable income.
• Tax-Free Growth: Funds in the account can be invested and grow tax-free.
• Tax-Free Withdrawals: Withdrawals for qualified medical expenses are tax-free.

HSA Contribution Limits for 2025:

What Expenses Can HSAs Cover?

HSA funds can be used for a wide range of qualified medical expenses, including:

• Doctor visits and hospital services
• Prescription medications
• Dental and vision care
• Over-the-counter medications
• Mental health services

What is a Flexible Spending Account (FSA)?

An FSA is an employer-sponsored account that allows you to set aside pre-tax dollars to pay for eligible healthcare expenses. Unlike an HSA, you don’t need to have a high-deductible health plan to open an FSA.

• Pre-Tax Contributions: Contributions reduce your taxable income.
• Immediate Access: The full annual contribution amount is available at the start of the plan year.
• Use-It-or-Lose-It Rule: Unused funds typically expire at the end of the plan year, although some plans offer a short grace period or allow limited rollovers.

FSA Contribution Limits for 2025:

What Expenses Can FSAs Cover?

FSAs can be used for many of the same expenses as HSAs, including:

• Copays and deductibles
• Prescription drugs
• Medical equipment
• Vision and dental expenses
• Some over-the-counter items

Key Differences Between HSAs and FSAs

Tax Benefits of HSAs and FSAs

Both accounts offer valuable tax benefits, but they work slightly differently:

• Reducing Taxable Income: Contributions to HSAs and FSAs lower your taxable income, meaning you’ll pay less in income taxes.
• Tax-Free Spending: When used for qualified medical expenses, funds from both accounts are spent tax-free.
• Investment Growth (HSAs Only): HSA funds can be invested, allowing them to grow over time without incurring taxes.

How to Use HSAs and FSAs Effectively

1. Estimate Your Medical Costs Carefully

Look at your past year’s medical expenses to estimate how much you might need in the coming year. This helps you avoid over-contributing, especially with FSAs, where unused funds can be forfeited.

2. Maximize Contributions (When Possible)

If you can afford it, contribute the maximum allowed to take full advantage of tax savings—especially with HSAs, since unused funds roll over indefinitely.

3. Use HSA as a Long-Term Investment

Unlike FSAs, HSAs don’t have a use-it-or-lose-it rule. Consider using your HSA as a long-term investment account. If you can cover smaller medical expenses out-of-pocket, let your HSA funds grow for future large medical expenses or retirement healthcare costs.

4. Track Your Expenses

Keep receipts and records of your healthcare spending. This ensures you’re prepared if the IRS asks for documentation to verify qualified expenses.

5. Don’t Forget About Over-the-Counter Products

Both HSAs and FSAs can be used for over-the-counter medications, first-aid supplies, and even menstrual products—so make sure you use the accounts for these common expenses.

6. Be Aware of Deadlines

• FSA: Check if your plan allows a rollover or has a grace period. If not, make sure to use your funds before the year ends.
• HSA: Funds can be used anytime, but keeping track of contributions and spending is key for maximizing benefits.

When to Choose an HSA or FSA

Can You Have Both an HSA and an FSA?

Yes, but with limitations. You can only contribute to both if the FSA is a Limited Purpose FSA (LPFSA), which covers only specific expenses like dental and vision care. This strategy can help maximize tax savings while still using an HSA for general medical expenses.

Common Mistakes to Avoid

• Overestimating FSA Contributions: Remember, most FSAs have the use-it-or-lose-it rule, so avoid contributing more than you’ll realistically spend.
• Not Keeping Receipts: Always keep documentation to prove expenses were eligible.
• Ignoring Rollovers or Deadlines: Don’t lose money by missing out on using funds before deadlines.
• Underutilizing Tax Benefits: If you’re not contributing to the maximum, you might be missing out on tax savings.

Sources

• healthcare.gov – Understanding HSAs and FSAs
• irs.gov – Contribution Limits for HSAs and FSAs
• investopedia.com – How to Maximize Tax Benefits with HSAs and FSAs
• nerdwallet.com – Tips for Managing Healthcare Savings Accounts