FSA vs. HSA: Know the Difference

If you are trying to deal with health care expenses, there are some ways to do so — and get a tax benefit. There are two main accounts that allow you to contribute money, get a tax deduction, and pay for health care services.

The two accounts are the Flexible Savings Account (FSA) and the Health Savings Account (HSA). It’s important to understand the differences between these accounts so that you use your health care dollars to best effect.

Flexible Savings Account

These are plans offered by employers (sometimes FSAs are called “cafeteria plans”). You can have a portion of your paycheck taken, before taxes, and deposited in the FSA. You don’t have to pay taxes on the money ever as long as you use it for qualified health care costs.

It’s a way to save up tax-free dollars to pay for items that might not be covered by your health insurance plan, or to pay out-of-pocket expenses that help you reach your deductible. There is a limit imposed on FSAs, though, thanks to health care reform. You can only contribute up to $2,500 to the FSA. This amount will be indexed to inflation, so as prices go up, your contribution availability will increase.

You should also be aware that the money in a FSA does not roll over from year to year. You spend all the money in this account for the year, or you lose it.

Health Savings Account

A more flexible option than the FSA is the HSA. This is an account that you can only open if you have a high deductible health plan (HDHP). As you choose your insurance plan, you can save money on monthly premiums by boosting the amount you are willing to pay out of pocket. For 2013, the HDHP minimum required deductibles are $1,250 for an individual and $2,500 for a family.

If you have a HDHP, you can make up for the increase in out of pocket expenses by setting aside money in a HSA. This is an account you own, and you can use it much like an IRA. You receive a tax deduction for your contributions, and the money in the account grows tax-free, as long as you withdraw it for qualified expenses.

For 2013, individuals with self-only coverage can contribute up to $3,250 and families can contribute up to $6,450. Contribution limits are connected to inflation, so they rise as the IRS decides that it becomes necessary.

One of the great features of the HSA is that the money rolls over year to year. You can grow your account indefinitely. And, later, it really does act as an IRA. You can withdraw the money at age 59 1/2 for any expenses (even if it isn’t medical), as long as you are willing to pay taxes on the withdrawal. As long as you use the money only for health care, though, the money can be withdrawn tax-free indefinitely.

Both of these accounts can be great savings tools to help you deal with health care costs, and receive a tax deduction. Consider your situation, and determine whether or not one (or both) of these accounts might work for you.

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