HSA vs. FSA: What are they and which one is right for you?

When it comes to managing healthcare costs, many people overlook two very powerful tax-saving tools: Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). These accounts are designed to help you set aside pre-tax dollars specifically for medical expenses. This allows you to reduce your taxable income making healthcare slightly more affordable. At a high level, both accounts allow you to pay for qualified medical expenses using money that has not been taxed. However, each account comes with its own unique rules, benefits, and limitations that need to considered for your situation compared to others.

Understanding how these accounts work and how to maximize the benefits can be the difference of saving hundreds to thousands of dollars per year, or unintentionally leaving money on the table. If you are deciding between the two or just want to make the most out of your money, it’s essential to know the differences and make the right choice for you. Let’s break down what exactly a HSA and FSA are, how they work, and how they compare to one another.

What is an HSA?

A Health Savings Account (HSA) is a tax advantaged savings account designed for individuals enrolled in high-deductible health plans (HDHPs). It allows account holders to set aside pre-tax income to pay for qualified medical expenses, which leads to an overall reduced expenditure on healthcare costs. The most important feature of the FSA is that you contribute using pre-tax income, essentially reducing your taxable income.

Key Features of the HSA:

• Eligibility: To contribute to an HSA, you must be enrolled in an HSA-eligible HDHP.
  • A High-deductible Health Plan (HDHP) is a type of insurance characterized by higher deductibles and lower monthly premiums compared to a traditional health plan. This means that you pay less each month for coverage, but the amount you incur out-of-pocket before insurance starts to cover will be higher. According to Forbes (Link), in 2025, the IRS defines an HDHP as a plan with a minimum deductible of $1,650 (individual) and $3,300 (family). For more information, you can refer to HealthCare.gov (Link).
• Contributions: Both individuals and employers can contribute to an HSA up to annual limits set by the IRS. For 2025, these limits are $4,300 for individuals and $8,550 for family coverage. (Link)
• Tax Advantages:
  • Pre-Tax Contributions: Contributions are made pre-tax, which reduces your taxable income.
  • Tax-Free Growth: Funds are growing tax-free over time. (HSA funds can be invested in various ways, similar to a retirement account, with the potential to increase value over time.
  • Tax-Free Withdrawals: Withdrawals for a qualified medical expenses are tax-free.
• Rollover: HSA are allowed to rolled over to other accounts in special cases, like a change in jobs or retirement. HSAs, unlike many other accounts, do roll over year over year. You are allowed 1 rollover per 12 months, which 60 days to deposit funds into new HSA after roll over funds are provided to you. There is a max on HSA rollovers, up to $640 for 2024. (Link)

What is a FSA?

A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows you to contribute pre-tax dollars for eligible healthcare expenses. Similarly to HSAs, FSAs allow you to reduce your taxable income, which also leads to potential tax savings.

Key Features of a FSA:

• Eligibility: To contribute to an FSA, you must establish this with your employers. Self employed individuals are not eligible, but you do not need a high-deductible health plan to participate.
• Contributions: Employees can elect an annual contribution amount up to $3,300. In some cases, employers can also contribute, but this is not mandatory.
• Tax Advantages: As mentioned above, one of the key points to an FSA is that the contributions are made pre-tax, which also lower your taxable income. This leads to lower taxable income and a tax-free method to pay for medical expenses.
• Unlike the HSA, FSAs do have a “Use it or Lose it” Rule, meaning that the FSA funds must be used within the plan year or else they are forfeited. According to Investopedia (Link), some employers do offer rollovers up to $660 for the 2025 year, or in some cases, a extra few months of grace period to use up the money.

Here’s a easy table to compare HSAs vs. FSAs

Now we know the strengths and weaknesses of each account, how do we decide which is best? Choosing between an HSA and FSA depends on your personal healthcare needs, employment situation, and financial goals. Here’s a quick glimpse of how each on could fit different lifestyles and goals:

HSA might be better for you if:

1. You have a HDHP and want to take advantage of lower premiums.
2. You want a long-term savings tool with the ability to roll over your funds year over year.
3. You prefer to invest your savings and grow your money tax-free.
4. You are generally healthy and don’t anticipate high medical costs but want a safety net.
5. You want flexibility to keep your account even if you switch jobs or leave the workforce.

FSA might be better for you if:

1. You have predictable medical expenses and want to set aside pre-tax money to cover them.
2. You don’t have a HDHP.
3. You want immediate access to the full contribution amount at the start of the year.
4. You work for an employer that offers FSA contributions or rollover options.
5. You prefer a simple way to save on medical costs without managing an investment account.

Both HSAs and FSAs offer great tax advantages to help reduce your healthcare expenses. HSAs tend to be better suited for those looking for longer-term savings and investment opportunities while FSAs are ideal for those with steady and predictable medical costs who want to take advantages of the tax savings. At the end of the day, everyone needs to think about their own situation and goals and decide which plan works best for them.

Tell us in the forum about your experiences with HSA and FSA enrollments and what you think on the topic or if you have any questions! Reach out to the community to get the advice you want before making a decision.