What is an FSA or HSA?

Sep 19 / Jay Zigmont, PhD, MBA, CFP®

Depending on the type of health insurance plan you opt for, you might have access to an FSA or HSA. These terms sound similar but they don't mean the same thing. What are they, and are they worth signing up for? Let's find out.

What's an FSA?

FSA stands for "flexible spending account," but as you'll see, "flexible" isn't really the best word to describe them. FSAs are funded annually; you can designate a certain amount (for 2023, the maximum is $3,050) amount of money to be taken out of your paychecks and put into an FSA, where you can then use it for qualifying medical expenses. The money isn't taxed, so it'll reduce your tax burden for the year.

An FSA could be worth using if you have access to one (not every health plan does) and if you know for a fact that you'll have medical expenses. If that isn't a given, an FSA might not make sense. If you don't spend the money within the designated period of time (usually the calendar year, but some plans might allow you a grace period of a few months), you'll lose it.

What's an HSA?

HSA stands for "health savings account," and these can be a real boon for your finances both now and in the future. Not every health insurance plan qualifies for one; you must be enrolled in a high deductible health plan. For an individual plan in 2023, your deductible must be at least $1,500, while your out-of-pocket max must be $7,500 or less. And the amount of money you can put into an HSA also varies; for the same individual in 2023, that amount can be up to $3,850.

HSAs offer a triple tax advantage. They are funded with pre-tax dollars, meaning they lower your taxable income for the year you contribute to one. Any money you spend on qualifying medical expenses is also tax free. And you can even invest the money in your HSA, and your growth is tax free, too. So if you are allowed to have an HSA, it pays to fund it, and if you can, pay for your medical expenses out of pocket, and keep track of what you spend. Years down the road, you can "reimburse" yourself with your HSA money. An HSA can even become another retirement account because of these features.

In short, if you're eligible for either an FSA or an HSA, consider your medical expenses to decide whether you should take advantage. And remember that FSAs are less flexible than their name would suggest, so it's really only worth using one if you will definitely have medical expenses and will be able to keep track of what you spend towards them, so you don't lose money. An HSA can be great if you have a qualifying insurance plan, especially if you can leave the money alone, letting it grow for the future and lowering your tax liability now.
Jay Zigmont, PhD, MBA, CFP® is the Founder of Childfree Wealth, a life and financial planning firm dedicated to helping Childfree and Permanently Childless people. Dr. Jay is a CERTIFIED FINANCIAL PLANNER™, Childfree Wealth Specialist, and author of the book “Portraits of Childfree Wealth.” Dr. Jay is the co-host of Childfree Wealth Podcast. His Ph.D. is in Adult Learning from the University of Connecticut.

He has been featured in Fortune, Forbes, MarketWatch, Wall Street Journal, New York Times, Business Insider, CNBC, and many other publications.