FSA or HSA: Which Offers the Best Tax Advantages?

FSA or HSA: Which Offers the Best Tax Advantages?

Flexible Saving Accounts (FSA) and Health Savings Accounts (HSA) can be used to pay for qualifying out-of-pocket expenses with tax-free dollars. But the IRS rules governing these accounts differ significantly. For example, FSA funds must be spent each year or you lose the money, while funds in a HSA rollover from year to year. Consider these factors when weighing your options.

Flexible Savings Accounts

If you have work-based coverage, you can use a FSA to pay for deductibles, copayments, some medications, certain medical equipment and other health care costs. You don’t pay taxes on FSA contributions, which are limited to $2,550. Employers can (but are not required) to contribute to your FSA.

Under IRS rules, FSA funds must be spent by a certain date or you forfeit the money. Employers, however, have the option to allow a $500 rollover to the next year. So before choosing a FSA, carefully review your medical needs and potential or planned costs for a given year.

Health Savings Accounts

To open a HSA, you must be under age 65 and have a plan with a high deductible of at least $1,300 for an individual and $2,600 for a family. HSA contributions and accrued interest are tax-free. The maximum contribution is $3,350 for individuals and $6,750 for families. If you are 55 or older, you can contribute an extra $1,000. The account belongs to you, whether you open a HSA on your own or through work.

Unlike a FSA, unspent funds can remain in a HSA from one year to another. Once you reach retirement age, a HSA converts to a typical individual retirement account. HSA funds can pay for deductibles, copayments and other health care costs. But if the money goes toward non-medical expenses, you must pay an income tax and a 20% penalty.

Make sure to take these factors into consideration when weighing out your options.

Have more questions about the FSA or HSA and how it impacts your taxes and finances? Don’t sweat it,  Rapid Tax has you covered.

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