It’s a great idea to get to know the plans you have spent money on for so many years. Those are the three-letter words we actually like — HSA and FSA — which keep dollars out of the hands we don’t necessarily care for; the IRS. Your Health Savings Account, or HSA, and your Flexible Spending Account, or FSA, can be amazing tools when retirement comes around. The fact is that these plans are meant to help us with our day-to-day medical expenses, but they can become even more valuable in retirement. First, we need to see what HSAs and FSAs are and how they work in order to see how they can help us. Do you know how your spending account works?
What Is An HSA?
Simply enough, it is a Health Savings Account. An HSA is a financial account that helps you save money pre-tax for qualified health care expenses. To qualify for an HSA, you must have a High Deductible Health Plan. Not every health insurance policy can qualify for use of an HSA. The guidelines change every year and, as of 2022, they are:
|Minimum Deductible Amounts||$1,400 Single / $2,800 Family|
|Maximum Out-of-pocket Limits||$7,050 Single / $14,100 Family|
|HSA Contribution Limits||$3,650 Single / $7,300 Family|
You can use your HSA funds on qualified health expenses, including:
- Most dental and vision
- Doctor’s visits
- Hospital service
- Preventive care
- Physical therapy
- Lab tests
- Durable medical equipment
- Addiction treatment
How Does It Work?
Once you get your high deductible plan started, you can start contributing to the account. You can usually do this through your bank or employer. You are limited to an annual contribution of $3,650 as a single person or $7,300 as a family, as stated above. A great detail about HSAs is you actually own the policy and the money in it. The money you put in, as mentioned before, is also contributed tax-free. These funds can also be invested in some cases and the interest you gain is also tax-free. You can withdraw funds in a pinch at a 10-percent tax penalty.
At age 55, you can contribute even more to your HSA by adding an additional $1,000 each year to your contribution. These are considered “catch-up” contributions.
If you are under the age of 65, you can use the funds for the qualified health expenses listed above. On the flip side, if you are over the age of 65, your plan is in full maturity and you can do whatever you want with it — as if it were a retirement account. So, all of those valuable tax-free contributions are all yours to do whatever you want. I suggest finding a good destination on Travelawaits.com (wink).
What Is An FSA?
Much like the HSA, an FSA, or Flexible Spending Account, is a health savings account that has certain tax benefits. All of the funds put into this account are also tax-free and do not contribute to Social Security or Medicare when they are taken out. The amount you can deposit annually has limits just like the HSA. As of 2022, the minimum amount of contribution is $120 a year and the maximum has been increased to $2,850 a year. Your employer can even match your contribution up to 100 percent and you can have an HSA and FSA at the same time.
The major drawback of the FSA is that it’s a “use-it-or-lose-it” account. Meaning if you do not use all of your funds annually, they are absorbed by your employer.
How Do They Work?
FSAs are only offered through employers in contrast to the HSA, where the contributions are made from your paycheck. You don’t even have to participate in the group health insurance on your check to participate in the FSA program with your employer. Your employer just needs to have some sort of health insurance plan available in order to offer an FSA.
An FSA can pay for a wider variety of situations than a HSA, which just pays for health-related activities. You can use your FSA to pay for child care with a Dependent Care FSA, for example.
As far as the “use-it-or-lose-it” goes, it is very important to properly estimate your annual health insurance costs. You only want to put in what you can withdraw in a year. Make sure to use an FSA calculator to estimate your contribution; once you set the amount, you cannot change it. One consolation is that you also get one of two options if you have money in your account at the end of the year:
- 2.5 months to spend the left over money
- Have it carry over up to $500 to spend the following year
Pro Tip: I suggest you check to see how much your employer is matching on your FSA and use that when calculating your medical contribution. In some cases, there are more than one option when looking at FSA plan availability.
Having both plans can be a good way to go, especially when combined. The FSA is not great for retirement savings, but they do have better taxation savings than the HSA. You do not pay federal income tax or employment taxes on the salary you contribute. In addition, they can help you save money when your employer contributes to the plan.
The FSA can help by offering you more savings ability when you are working, but the HSA offers more after you retire with more investment options. If you have access to an FSA through your employer, I highly recommend taking advantage of it for your day-to-day medical expenses. You can then use your HSA for the larger situations that may occur down the road. If you eat your broccoli and take that daily walk, you may be able to use the HSA funds in your healthy retirement.