When choosing health care benefits, your company might give you the opportunity to choose to have a Health Savings Account (HSA) or a Flexible Spending Account (FSA). These accounts can be a great way to put money aside to use on healthcare expenses throughout the year, while reducing your taxable income. While both of these types of accounts give you the ability to use pre-tax dollars on healthcare spending, there are some important differences. You also might be eligible for a Dependent Care Flexible Spending Account (DCFSA), which lets you use pre-tax dollars on care for a dependent – like a child under the age of 13 or an adult who is unable to take care of themselves.
Health Savings Account (HSA)
With an HSA, you put pre-tax funds into it, which reduces your tax burden at the end of the year. And, your HSA rolls over year-to-year, so it’s helpful to put in as much as possible (up to the IRS limit for that year), because the money will never go away. Plus, any money in your HSA can be taken out with no penalty when it comes time to retire.
Flexible Spending Account (FSA)
An FSA is also funded with pre-tax dollars. However, any money in your FSA is use-it-or-lose-it. That means that, at the end of the year, any unused funds will be forfeited based on your company policies. It’s important to only put in an amount of money that you believe will be used so that you don’t lose any.
Dependent Care Flexible Spending Account (DCFSA)
A Dependent Care FSA is just like an FSA for healthcare, except the money has to be used for expenses related to taking care of a dependent. That could mean childcare expenses for a child under the age of 13 or expenses related to a disabled spouse or an aging parent. And remember – money in an DCFSA has to be used by the end of the year, or it will be forfeited.
For all of these accounts, in order to maintain the tax benefits, you can only use the money for approved expenses. For example, the standard HSA and FSA accounts can be used for deductibles, copayments, prescriptions, certain over-the-counter medications and some medical equipment. If you have specific questions, the IRS has compiled a list of expenses that can be paid for using money from your FSA or HSA. You can also see the resources the IRS has for a DCFSA.
So how should you decide how much money to put into your account? Well, once you know what the maximum limit is, it’s important to think about your expenses for the year. A good rule of thumb for an FSA is to put in only an amount that you are completely confident you will use, since that money will be forfeited at the end of the year. For an HSA, maxing out your contribution might make sense, because the money will remain yours regardless. If you put more money in your HSA than you think you will spend in a year, it will roll over to the next year and can even be used in retirement. And, since the HSA is funded with pre-tax dollars, any money you put in might lessen the amount you owe on April 15.
If you would like more information about how to use your HSA, FSA or DCFSA, Atlantic Union Bank has partnered with Banzai on a coaching session that you can use to input your expected expenses to see how much you should put into your account. This tool can help you make decisions about your individual situation so that you can get the most out of your account.