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How to Make the Most of Your HSA and FSA for Healthcare Savings
- Authors
- Name
- David Botha
How to Make the Most of Your HSA and FSA for Healthcare Savings
Healthcare costs can be a significant drain on your finances. Thankfully, there are powerful tools designed to help you save on medical expenses: Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). But simply having one isn’t enough – you need to understand how to use them effectively. This guide will help you get the most out of your HSA and FSA in 2020.
What are HSAs and FSAs?
- Health Savings Account (HSA): An HSA is a tax-advantaged savings account specifically designed to be used with a high-deductible health plan (HDHP).
- Tax Benefits: Contributions are tax-deductible (or pre-tax if made through payroll deduction), earnings grow tax-free, and withdrawals for qualified medical expenses are also tax-free.
- Triple Tax Advantage: This is what makes HSAs so appealing.
- Flexible Spending Account (FSA): An FSA is a pre-tax account set up to pay for qualified medical expenses. However, unlike an HSA, FSAs typically have a "use-it-or-lose-it" rule.
Key Differences & Considerations
| Feature | HSA | FSA |
|---|---|---|
| Health Plan | Requires HDHP | Can be used with any health plan |
| Use-it-or-Lose-it | No | Typically Yes |
| Carryover | Yes, unused funds roll over | Often No, unless specific rules apply |
| Ownership | You own the account | Employer owns the account |
Making the Most of Your HSA
- Eligibility: To contribute to an HSA, you must be covered under a qualified HDHP. (Check the IRS website for current HDHP requirements.)
- Contribution Limits: For 2020, the HSA contribution limits are:
- Individual: $3,550
- Family: $7,100
- (These limits can change annually – always check the IRS website).
- Catch-Up Contributions: If you're age 55 or older, you can make an additional $1,000 catch-up contribution.
- Invest Your HSA: Don't just let your HSA funds sit in a low-interest account. Many HSAs offer investment options, allowing you to grow your savings over time.
- Treat it Like a Retirement Account: Start saving early and regularly to take advantage of the long-term growth potential.
Maximizing Your FSA – A Strategic Approach
- Understand the “Use-it-or-Lose-it” Rule: Most FSAs require you to spend the money within the plan year. If you don’t, you typically forfeit the funds.
- Estimate Your Expenses: Carefully assess your anticipated medical expenses (co-pays, prescriptions, dental, vision, etc.) to ensure you can utilize the full amount.
- Carryover (If Available): Some FSAs allow for a limited carryover of funds to the next year. Confirm your plan’s rules.
- Communicate with Your Employer: Discuss your FSA options and potential expenses with your HR department to ensure you're making informed decisions.
- Consider a Healthcare Spending Account (HSA-linked FSA): Some employers offer a hybrid account that combines the benefits of both HSAs and FSAs.
Resources:
- IRS HSA Information: https://www.irs.gov/hsas
- IRS FSA Information: https://www.irs.gov/faqs/flexible-spending-accounts-fsas
Disclaimer: This information is for general guidance only. Consult with a qualified financial advisor before making any decisions about your healthcare savings.