When thinking about your healthcare, you might not immediately associate it with taxes. However, there are options that carry tax-benefits which you should consider to lower your tax burden. Health savings accounts (HSAs) and Flexible Spending Accounts (FSAs) are a growing trend in health care, and worth looking into. Let's go over these two options so you can more easily pick the type that is suitable for your needs.
What is an HSA?
An HSA is a tax-exempt savings account established for the purpose of paying for the qualified medical expenses of an individual and/or their spouse and tax dependents. In order to get an HSA, you must first have a qualifying high-deductible health plan.
This savings account allows you to set aside some money on a pre-tax basis, with the goal of lowering your overall healthcare costs.
What Are The Benefits of an HSA?
HSAs are designed to provide eligible individuals with the following federal tax benefits:
- Tax-free contributions
- Interest and other earnings on HSA contributions accumulate tax-free
- Amounts distributed from an HSA for qualified medical expenses are tax-free as well
HSA contributions can ultimately lessen your tax burden. If you make a certain amount of money a year, and contribute a portion of those earnings to your HSA, you will only be taxed on the remaining amount that was not entered into the HSA.
In addition to tax benefits, HSA plans have grown in popularity because they offer potential health care cost savings to both employers and employees. For example, individuals covered under an HSA are more likely to seek preventive care, choose generic drugs, not misuse the emergency room, and use online tools to research health care providers
How Can I Use My Health Savings Account?
First and foremost, your Health Savings Account serves to assist you in reimbursing yourself for any out-of-pocket medical expenses. However, there are additional benefits and uses you may not be aware of. HSAs can work as a retirement savings or investment vehicle as well.
The great part about Health Savings Accounts is the fact that the money you input is yours forever, which opens up a lot of potential for your future. By contributing the maximum contributions each year, you can easily save for retirement expenses. In addition, one may consider investing unspent contributions in mutual funds, stocks, or other investment vehicles.
What is an FSA?
Through an employer, you may elect to enroll in a Flexible Spending Account to help cover healthcare expenses. You are able to select the amount you wish to contribute on a monthly or bi-weekly basis. As a result, that money will be deducted pre-tax. When it comes time for you to use the funds you've set aside for qualified expenses, you won't have to pay taxes on your withdrawals either.
Benefits/Uses for your Flexible Spending Account
Unlike HSAs, the money you put into an FSA doesn't last forever. Generally, you need to spend the money you've contributed within a year in most cases. Depending on your plan, however, you may be able to carry over a certain amount into the following year. A big advantage of an FSA is that it enables you to get the necessary health items you need, when you need them, tax free. This is good for your regular visits, medications, vaccinations, or necessary medical devices. Some examples of ways you could utilize your FSA include:
- Diagnostic services
- Psychiatric care
- Prescription drugs
- Hearing aids
- Blood pressure monitoring device
- Laboratory fees
Which Tax-Advantaged Healthcare Option is Right For Me?
It all depends on your needs. HSAs are more robust in the sense that all the money you put into them doesn't ever expire and you can utilize them to save money for the future. Though, a high-deductible health plan is a prerequisite, which may be a drawback for some individuals. FSAs are a bit more restrictive and don't have the same long-term benefits as HSAs, but if you're looking for a way to more easily cover your medical expenses here and now, it may be the plan for you.
For more guidance and information regarding tax advantaged healthcare options, contact our team today.