Maximize Your Health Savings: FSAs vs. HSAs Explained

Ever wondered how to make your money work smarter for your health care costs? Join me, Stacey Hyde, as we unravel the complexities between Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) in this enlightening episode of Better Financial Health in 15 Minutes or Less. You'll learn how FSAs can be a great short-term solution for covering medical expenses like co-pays and eyeglasses, but they come with the caveat of potentially losing unused funds at the year's end unless your employer offers a rollover. On the other hand, I’ll guide you through the long-term benefits of HSAs, which allow you to save tax-free for future health expenses, especially if you’re aiming for a financially secure early retirement.

Tune in as I explain how HSAs can act as a tax-advantaged super-saver account, much like a Roth IRA, and how they can serve as a financial lifeline by covering COBRA or exchange health plan premiums when you retire. This episode is packed with insights on how to strategically use these accounts based on your financial goals, whether you’re a parent juggling childcare costs or planning for life post-retirement. Don't miss this opportunity to empower yourself with the knowledge to optimize your financial health and ensure you make informed decisions during this open enrollment season.

Envision Financial Planning. 5100 Poplar Avenue, Suite 2428, Memphis TN 38137. (901) 422-7526, This communication is strictly intended for individuals residing in the United States. Advisory Services offered through Envision Financial Planning, a Registered Investment Adviser.

Transcript

Speaker 1: 0:00

Hi, I'm Stacey Hyde and I'm back for another episode of Better Financial Health in 15 Minutes or Less. And since it's open enrollment season for a lot of folks, I want to talk about the difference between a flexible spending account and a health care savings account, because they sound a lot alike but they're really quite different. Flexible spending accounts have been around kind of forever and they allowed you to put money aside to pay for co-pays, deductibles, eyeglasses, your kids braces, anything medical like that. That can also be used for over-the-counter medications and contact solutions, that sort of thing. The big issue with them that a lot of people had is they were use it or lose it, meaning that any money you put in, if you didn't use it, it went away at the end of the year. They did allow you to roll some money over, but you have to check with your employer, because that's something the employer had to elect and unfortunately, not all employers elected that. So what does that mean? For example, if your employer elected to allow the rollover and you put in $2,000, but you only spent $1,500, that $500 would roll over and be available to you for the next year, which is really nice, because if all you have to do is get close, then you definitely want to take advantage of that because those flexible spending accounts they go in before federal tax if you're subject to state tax, before state tax and even before social security taxes, so it really can save you a lot of money. The same thing is also true if you are paying child care expenses. If you've got a child in daycare, there's more rules around those, but those do not have any rollover, so you want to make sure that you get those amounts right. That's usually not a problem because the limits are much lower than most people are paying for daycare expenses. So that's something to look at as well. Those elections once you make them for the year, you can't change them unless you have a change in family status, which means that you or your spouse have a job change, you have a child born, your marital status changes say, for example, you get married then you can make a change there.

Speaker 1: 2:33

Now let's talk about healthcare savings accounts. I think they are an incredible tool really for longer term savings. I meet with a lot of people who would like to retire before age 65. And one of the issues with doing that is the health care coverage can be quite expensive to cover from, say, when they retire at 60 till they hit 65 and become eligible for Medicare. Well, the cool thing about a healthcare savings account is many employers if the health plan is eligible for that, which means it has a deductible it doesn't have co-pays then you can put money in there and the money goes in there tax-free. So you put it in, you're not paying any of those taxes I talked about before federal state FICA taxes, that's Social Security taxes but the money grows tax-deferred and it rolls over from year to year to year. So you can accumulate money in there and in most cases your employer will also give you the option to invest those funds.

Speaker 1: 3:43

So we actually recommend in most cases, if you can afford to, to let those accumulate, to try not to use that money to pay for your doctors or something like that. Try not to use that money to pay for your doctors or something like that. Now, of course, if something catastrophic happens, that's what it's there for, use it. But if life goes on and you just have, you know, the regular $1,000, $2,000, just pay that out of current cash flow. Let this accumulate. Then when you retire you can pull money out of that HSA to pay the COBRA premiums to pay your health care premiums on the exchange, and they are tax-free. So it sort of works like a Roth, except the money went in tax deductible, it grows tax deferred and then it can also come out tax free on the end. There is no other vehicle like that available.

Speaker 1: 4:39

So it's a hugely powerful tool, but in order to have one, you have to have an eligible high deductible plan. So that is the key You've got to make sure that your plan is eligible before you can open an HSA. So what happens? If you work for an employer that has an HSA eligible health plan and then you go to work for one that doesn't Guess what, you can leave that HSA there, continue to let it grow, invest. You just can't make contributions to it and then you can come back and add to it. Or if you leave one employer that has an HSA and you go to another employer that has an HSA, generally speaking, we recommend that you roll your existing HOA into the other one, just for ease of administration, because sometimes you start to have all these accounts and it can get complicated. There can also be some minimum charges that apply, and so you're better off having a larger balance, but you really have to look at that. But that's really the difference.

Speaker 1: 5:44

Fsa pretty much available to anyone. Hsa you have to have an HSA eligible plan. Fsa you need to come pretty close to getting your expenses right, unless you're fortunate enough to work for an employer that allows you to roll over a portion HSA. You want to accumulate it and let it grow so, and it does roll over, you don't have to worry about spending it. So that's really the difference. We've often get a lot of questions around that and it can be confusing. So thanks for tuning in. This has been another episode of Better Financial Health in 15 minutes or less.