Health savings accounts (HSAs) and flexible spending accounts (FSAs) both help you shore up money to cover qualified medical expenses tax-free.

But there are key differences and details you should understand before you decide on one. So let’s explore these accounts a bit further.

What’s an HSA?

An HSA is designed to help you save for future medical expenses while offering distinct tax benefits. Here are some highlights.

• HSA contributions are tax-deductible
• Money in an HSA grows tax-free with compound interest
• Withdrawals are tax-free for qualified medical expenses

Additionally, many HSA providers let you invest your HSA dollars in securities like mutual funds, exchange-traded funds (ETFs), and stocks. Many financial advisors recommend you keep your HSA contributions in cash that earns interest until you have a sizable amount to invest in growth-focused securities.

But in order to open an HSA, you need to pair it with a qualifying high-deductible health plan (HDHP). For 2024, the minimum deductible is $1,600 for individual coverage or $3,200 for family coverage.

Moreover, it’s important to understand HSA contribution limits set by the IRS. For 2024, those limits are $4,150 for individual coverage and $8,300 for family coverage.

Another important benefit to HSAs is that when you turn 65, you can withdraw HSA funds for anything penalty free. But you’d still owe income taxes on the distribution for a non-qualified expense.

Nonetheless, this perk allows you to use your HSA as a retirement savings tool that can work in pair with your individual retirement account (IRA), Roth IRA, or 401(k) plan.

What’s an FSA?

An FSA allows you to save for qualified medical expenses, as defined by the IRS in Publication 502. FSAs are offered by many employers as part of their benefits packages.

The money you contribute to an FSA is made on a pre-tax basis. This means your FSA contributions could potentially reduce your taxable income and therefore lower your tax liability or increase your refund.

In addition, FSA contributions aren’t subject to Social Security tax or Medicare tax.

But unlike with an HSA, your FSA dollars don’t roll over into the next year. You forfeit any unused funds after the plan benefit year ends. In other words, your FSA account is “use it or lose it.”

However, some companies allow you to rollover a portion of your remaining FSA funds into the next year or let you keep your current balance for a grace period that can last up to 2.5 months after year-end.

But you’d lose all your FSA money if you lose your job or change employers. With an HSA, you can rollover your HSA to another account even if you are no longer with the company that sponsors it.

Similarly to HSAs, however, FSAs have contribution limits. For the 2024 plan year, the FSA contribution limit is $3,200.

HSA vs FSA: Which Is better?

If you’re eligible for an HSA and FSA, the decision comes down to your financial situation, goals, and preferences.

HSAs have higher contribution limits. And the money in your account is yours forever. It stays with you year after year. But unused FSA dollars expire after the end of the benefit year.

Many HSA providers including financial institutions and banks may allow you to invest your HSA in the stock market for potential growth. This is not the case with FSAs.

However, both HSAs and FSAs allow for tax-free withdrawals as long as they are used to cover or reimburse you for qualified medical expenses.

But can you have both an HSA and an FSA? You can pair a special type of FSA with your HSA. This is known as a limited purpose flexible spending arrangement (LPFSA). This type of account covers only expenses not covered by your health plan.

But if you don’t qualify for an HSA, an FSA may be an effective option to save for medical expenses – provided you use your funds within the plan benefit year.

Why we covered this

Both HSAs and FSAs can help you save for qualified medical expenses. But these accounts have key differences like contribution limits, portability, and investment options. So it’s important to know these details before you choose either one. So we designed this comparison piece to help you make the decision that’s right for you.

If you want to learn more about HSAs, check out our regularly-updated HSA main page for the latest coverage.

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