TAX BENEFITS OF FSA or HSA
Breaking it down: What is the difference between FSA and HSA?
First, it’s important to note that both types of accounts serve to allocate pre-tax dollars to be set aside for specified purposes — including (but not limited to) medical, vision, and dental expenses you may incur throughout the term of your given plan.
- HSAs are accounts you set up yourself. You can set up an account at your bank or credit union, for example. With this account, you can keep it no matter where you go or where you work (or if you work at all). You — and possibly your employer — contribute to the account throughout the year. The only stipulation is you must have a High Deductible Health Plan (HDHP) to have an HSA. Further, funds in an HSA can be rolled over each year, making it a smart choice if you plan on long-term savings.
Once your HSA is set up, you can allocate additional money to the account with automatic deductions from your paycheck, and all funds contributed are tax deductible. An HSA is also a good consideration for those who wish to carry their plan and funds with them, even if they choose to pursue a career with a different employer.
- Your employer owns your health FSA, and both you and your employer can fund it. One of the key benefits of an FSA is that funds can be utilized for childcare expenses in addition to products and services related to your health. This type of plan is, however, a use-it or lose-it arrangement. There is a rollover provision, though. Up to $500 of your unused FSA funds can be rolled over to the next year. If you contribute more throughout the year than you’re able to spend, you may find yourself scrambling to make doctor’s appointments in December to use up what you’ve put into your FSA.
- As is the case with an HSA, you can apply funds to your FSA from your gross pay, which means that what every dollar you put in is considered a tax-free contribution. In addition, you’re not likely to owe taxes on any withdrawals as long as you use the funds strictly for qualified expenses.
- There goes most or all of your deduction. If you qualify for a health account or other plan, it’s usually well worth the trouble to set it up and use it for any qualified medical expense needs that arise throughout the tax year.