At times, you may encounter a situation where you have to perform a medical related purchases that your insurance does not cover. It could be something as simple as high-end frames for new lenses or even something bigger like a dental procedure.
This is where a health savings account (HSA) or one flexible spending account (FSA) can make the financial burden feel a little lighter. Both of these accounts are intended to cover qualified medical expenses that are not fully covered by insurance, however, each has some important differences. Also, keep in mind that you can’t contribute to both HSA and FSA accounts in the same year, so that means you have to choose between them.
Below, Choose CNBC We break down what you need to know about these accounts, including how they work and how to choose the right account for you.
What are HSA and FSA accounts?
The HSA is an account designed to help consumers with high deductible health plans (HDHPs) save on upcoming medical expenses. To open an HSA, individuals need to meet the following criteria:
- Must be covered under a qualified high-deductible health plan (HDHP)
- May not be covered under any health plan that is not a qualified HDHP
- Not enrolled in Medicare (the healthcare component of the Social Security program)
- May not be claimed as a dependent on another individual’s tax return
Amount in one HSAs can even be invested. It is therefore not only recommended as a way to save on medical expenses but also to build wealth for expenses later in life.
An FSA is similar to an HSA in that it allows individuals to save on medical costs. One difference is that you don’t need to have an HDHP to be eligible for the FSA; Your employer only needs to provide FSA registration for you to be eligible to apply.
Another big difference is that each account has a different contribution limit. The new HSA contribution limits for 2024 are $4,150 for single individuals (up from $3,850 in 2023) and $8,300 for family coverage (up from $7,750 in 2023). The FSA contribution limit for 2023 is lower at $3,050 per account, regardless of whether it’s for individuals or families.
What is a high deductible health plan (HDHP)?
HDHP is a health plan that, as the name suggests, has a high minimum amount that must be paid before coverage can begin and cover the rest of your medical costs. To be considered HDHP, a plan must have a minimum deductible of $1,500 for self-insurance and a minimum deductible of $3,000 for family coverage, according to the 2023 guidelines.
How does HSA work?
An HSA is famous for having three distinct tax advantages: First, it allows you to make pre-tax contributions, reducing your total taxable income. Second, your money grows tax-free. If you can invest your HSA fundsthis works for you because your money increases even if you don’t contribute anything.
A final tax advantage is that you can withdraw tax-free for any qualified medical expenses (determined by the IRS). If you don’t want to use your money for medical expenses, you can wait until age 65 to withdraw it and avoid any of the penalty fees you normally pay for using it for these reasons. non-medical. Just be aware that you will still have to pay tax on these withdrawals.
Unlike most FSAs, the balance in an HSA is rolled over every year even if you haven’t used any of the funds.
How does an FSA account work?
Like the HSA, the FSA helps reduce your taxable income by allowing pre-tax contributions. However, you cannot invest the money you contribute into an FSA account. Also, you usually can’t roll over your funds to the next year if you don’t use them up, which is the key difference between this account and an HSA.
However, some employers may allow you to transfer a small portion of the balance or give you a grace period to use up your funds before they “expire”, but that is up to you. employer’s decision.
Also, unlike an HSA account that stays with you no matter where you work, you will lose your FSA if you change jobs and will have to register a new account with your new employer.
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Should you choose an HSA or an FSA?
It is important to remember that you cannot contribute to both an HSA and an FSA at the same time even if you meet all the requirements for both accounts (some exceptions can be made to the FSA). purportedly limited to dental and vision expenses only, and the dependent care FSA covers eligible expenses related to aged and child care). This means that you will have to decide which account best suits your needs.
An HSA is most beneficial when you don’t have to pay for regular medical expenses yourself. This is because it doesn’t follow a “use it or lose it” policy as the FSAs do. This gives your money time to grow, so if you have a large medical expense in the future, you should expect a higher balance to cover the bill. Also, if you never end up using your HSA funding at a young age, you’ll be able to use these funds in retirement.
If you have some additional recurring medical expenses during the year, the FSA may be more reasonable because the amount is “use it or lose it” and having more regular medical expenses makes you more likely to spend it. spend the balance before it expires.
Make sure you do this before getting either account
Before applying for an HSA or FSA, you should consider covering some other financial base. This means there is a Emergency Fund with an amount that makes you feel confident in your ability to pay big expenses if the unexpected happens.
If you care about your retirement savings more than any medical expenses, you should make contributions to both funds a priority. employer-sponsored 401(k) accounts and a Roth IRA before you worry about HSA or FSA because 401(k) and Roth IRAs are designed to fund retirement. Additionally, a Roth IRA is extremely tax-advantaged in the sense that you invest your after-tax money incrementally over time, and you won’t have to pay taxes on your withdrawals in retirement. Additionally, the Roth IRA has a much higher contribution limit of $6,500 for 2023. This is a benefit you’ll want to take advantage of before switching to an HSA or FSA, both of which have significantly lower contribution limits. tell.
What are some alternatives?
If you don’t qualify for an HSA or FSA or don’t have an account that’s right for you, there are some other smart ways you can save yourself on healthcare-related expenses. .
If your primary goal with an HSA is to use it as a means of retirement savings but you don’t qualify for this account, you can simply open a Roth IRA from a reputable broker instead. and contribute to it. CNBC Select also recommends improve as another robo-advisor option.
improve
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Minimum deposit and balance
Deposit and minimum balance requirements may vary depending on the investment vehicle chosen. For example, Betterment does not require clients to maintain a minimum investment account balance, but has a minimum ACH deposit of $10. Premium investments require a minimum balance of $100,000.
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fees
Fees may vary depending on the chosen investment vehicle. For Better Digital Investment, 0.25% of your fund balance as an annual account fee; Premium investments have an annual fee of 0.40%
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Bonus
Up to $5,000 managed for free for a year with a qualifying deposit within 45 days of signup. Only valid for new personal investment accounts with Betterment LLC
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Investment vehicle
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Investment options
Stocks, bonds, ETFs and cash
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Methods of education
Improved provision of retirement and other educational materials
Terms apply. Not applicable to crypto asset category.
And instead of an FSA, you might consider opening a high-interest savings account to store money specifically for out-of-pocket medical expenses. ONE High interest savings account maybe even more appealing because of the simple fact that you won’t have to worry about losing your contributions if you don’t use them at the end of the year. Also, the account is not tied to your employer so you can open it whenever you want.
You can sometimes feel confused or disoriented when you have to save for multiple goals, so savings accounts that offer a “bucket” feature can be helpful for you to send money toward goals. specifically. Wealthfront Cash Account include this feature so you can create a “medical expense” group and start sending money. If not, Synchronous Bank is another solid option as it gives account holders an ATM card for easy cash withdrawal (not many other banks offer ATM cards with their high-interest savings accounts).
Wealthy cash account
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Monthly maintenance fee
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Minimum deposit to open
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Minimum balance
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Annual Yield Percentage (APY)
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Free ATM network
19,000 free ATMs through Allpoint.
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ATM fee refund
No refunds for out-of-network ATMs
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Overdraft fee
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Mobile check deposit
Available with the Wealthfront App
pros
- Relatively high APY and up to $5 million FDIC coverage for individual Cash accounts.
Defect
- Limited ATM network with no refunds
High-interest savings Synchronous bank
Synchronous Bank is an FDIC Member.
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Annual Yield Percentage (APY)
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Minimum balance
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Monthly fee
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maximum transaction
Up to 6 free withdrawals or transfers per statement cycle
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Transaction fees are too high
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Overdraft fee
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Suggest checking account?
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Donate ATM card?
pros
- Strong APY
- No minimum balance or deposit
- No monthly fees
- Easy ATM access
- 1 physical branch (in Bridgewater, New Jersey)
Defect
- There is no option to add a checking account
bottom line
Both HSA and FSA accounts are intended to help you cover any medical expenses that are not covered by insurance. However, these accounts may not be best for everyone. As always, you should consider your individual needs before deciding one way or the other.
If you don’t think either account is right for you, you can consider investing your money or opening one instead. High interest savings account means for medical expenses.
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Editorial Notes: The opinions, analysis, evaluation, or recommendations expressed in this article are those of the Select editors alone and have not been reviewed, approved or endorsed by any third party.
