HSA Or FSA: Which Is Better For Medical Savings?

Health insurance deductibles and co-payments, plus uncovered items like your child's braces, can put a dent on your bank account.

That is why flexible spending and health savings accounts, where you put money away tax-free to pay for out-of-pocket health-care expenses, generally are good ideas. What is better, the saved money from an FSA and an HSA lowers your reported taxable income, just like contributing to a retirement account. Which is the best for you, an FSA or an HSA?

First, let us look at how they are constructed. You can get into these health accounts during your employer's open enrollment period which usually runs through December. You also can enroll if you have a "qualifying life event," such as a change in marital status, a new child, the death of a spouse or dependent. Also, if you take a new job, you can sign up within 30 days.

Most employers do not offer both an FSA and an HSA—usually, if they do, you cannot get into both. If you have a choice, knowing the differences is essential. Among other things, they can put more money into an HSA and roll it over into a new year, but an FSA lets you take money out even before you have contributed it.

Flexible Spending Accounts

For 2018, the maximum contribution you can make is $2,650, and this rises to $2,700 in 2019. It is not a lot, but if your spouse has health coverage, he or she can take out another FSA.

A big downside is a use-it-or-lose-it rule; should you fail to spend all the money in your fund by year-end, you lose it. As a result, you have to estimate how much you will need to pay yourself in the coming year.

At least, companies have the option of giving employees until March 15 to spend leftover money or even keep up to $500 to the next year, though many do not do it.

The good news is that you can start spending the whole sum you designated for the year ahead on January the first, even though your contributions are spread over the coming 12 months. Leave the job, and you canot take the money with you, as you would with a retirement account or an HSA.

Health savings accounts.

The advantage here, of being able to sock away more money and not forfeiting the unused amount on December 31st, is considerable.

In 2018, a single person can save $3,450 in an HSA and in 2019, $3,500; a family $6,900 and $7,000. Further, if you are 55 and older, you can put in an extra $1,000 as a catch-up. In addition, self-employed people can create an HSA for themselves, but not an FSA.

However, HSAs have their weaknesses; to set one up, in both 2018 and 2019, your health plan needs to have a yearly deductible of $1,350 for an individual and $2,700 for a family. That's a bit steep.

Regardless, either plan can be a boon tax-wise. Utilizing FSAs and HSAs are best considered within a strategic tax plan, which is technical and depends on your personal circumstances. We're here to help with any questions.

This article was written by a professional financial journalist for Private Group Wealth Management, LLC., and is not intended as legal or investment advice.

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