Ahealth savings account or HSA and a flexible spending account or FSA are both accounts that give the individual tax advantages when saving specifically for future medical costs.
The flexible spending account (FSA) is called flexible spending arrangement by the IRS. Both HSA’s and FSA’s provide tax savings on health costs, but the purchase of a medical plan that pays few costs up front is required to qualify for an HSA, something not everybody should do.
What’s the difference between an HSA and an FSA
An HSA or an FSA allow a person to set aside money for health care costs that the IRS considers medical expenses, like prescription drugs, dental and vision care, over-the-counter medications and other health-related items.
Many times, the individual will receive a debit card for the account so he can pay for the qualifying expenses.
Both types of accounts have tax benefits, but also some notable differences between them.
Know this if you’re choosing a HSA
An health savings account has a contribution limit, and their contributions are pretax or tax-deductible, additionally HSA funds can be invested – and rolled over year to year.
An individual must qualify for an HSA, and the money they use for eligible medical expenses is tax-free, with the possibility of the employer to contribute.
Know this if you’re choosing a FSA
Just like a health savings account, the flexible savings account has a limit on the savings that can be made. Sometimes, when an individual doesn’t use the money by the end of the year, the money can be lost, with the money being pretax and available upfront.
Even though employers can contribute to an FSA, most of them don’t.