• HSAs and FSAs: The Differences and Benefits, Explained by a Financial Advisor

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    health savings account

    Contributed by Jaclyn Dunn, CFP® of BFG Financial Advisors

    In the U.S., healthcare is a huge expense for individuals and families and is only expected to grow in the future. For this reason, there are tax-advantageous resources available that allow you to pay for healthcare-related expenses in a more affordable way.

    HSAs

    A Health Savings Account is available to those with high-deductible health insurance plans and are the only savings vehicle available in the U.S. that are eligible to be completely tax-free. For a single person in 2020, there is a $3,550 annual contribution limit, and that number doubles to $7,100 for a married couple. If you’re over 55 years of age, you can contribute an additional $1,000 each year.

    Contributions to this account can either be made directly from your paycheck before paying income tax, or you can contribute directly and deduct the contribution on your tax return. The money in this account can be used at any time to cover qualified healthcare expenses, such as deductibles, copayments, and prescriptions, without having to pay taxes on the distribution. Often, these accounts come with a debit card that you can use at point-of-purchase to cover these expenses.

    FSAs

    A Flexible Spending Account is another type of account used for healthcare expenses, and the availability is based on your employer—not every company chooses to include this in its benefits package. You can open this account during open enrollment for your employee benefits, and your chosen contribution amount cannot be changed. The annual contribution limit for 2020 is $2,750.

    Because this account is owned by your employer, in order to take the money out you need to submit a receipt and reimbursement request to whomever manages the account at your company.

    The benefits

    For both accounts, the obvious benefit is that you’re not paying taxes on the money you contribute or withdraw (if it is for a qualified medical expense), which can add up to thousands of dollars of savings. 

    For an HSA, the biggest benefit is that the account is investible. If you can cover healthcare costs now out of pocket, I recommend not touching the money in this account and treating the funds like a retirement account. By letting the money grow throughout your life, you could have a substantial balance available to you in retirement when healthcare costs are generally higher. 

    For FSAs, there are actually different types of accounts for different expenses. Aside from the normal healthcare account, the Dependent FSA can be used to cover various expenses related to dependent care, including daycare, afterschool care, and summer camp. For this type of FSA, the annual contribution limit is $5,000. This is a great option for parents to save on childcare. 

    Which is better?

    Because you’re unable to have both accounts, look into what is available to you. If you have the option to use either, the type of account that is better for you depends on your own healthcare spending.

    If you don’t have a substantial amount of healthcare costs each year, an HSA would be a great option for you to use as a retirement savings vehicle while paying current costs out of pocket. 

    If your annual healthcare or childcare costs are significant, consider an FSA. If you do use this type of account, there are two things to keep in mind.

    1. Once set, your contribution amount cannot be changed. Make sure to plan carefully, taking into consideration how much you’ve spent on eligible expenses in the prior years.
    2. Remember that the funds must be withdrawn within the tax year, with some employers offering grace periods or up to $500 in carryover into the following year.

    For additional financial resources including articles, podcasts, and books, visit brotmanmedia.com.

    The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results. Kestra IS and Kestra AS do not provide tax or legal advice.

    HSAs And FSAs

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