Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are both offered by employers and designed to ease the financial burden of healthcare. But there are major differences between these two types of plans. One notable difference is that HSA funds can be invested, while FSA funds cannot.
How Is an HSA Different From an FSA?
With both an HSA and an FSA you can set aside a portion of your salary tax-free to pay for qualified medical expenses, including prescription medications, deductibles, and copays. Some employers make contributions to both types of accounts. Key differences include the following:
HSA funds roll over to the following year. With an FSA, you must use the funds by the end of the year or lose them.
HSA money can be rolled over from one plan to the next, either from one employer’s plan to another or to an individual HSA. When you change jobs, you lose your FSA funds, unless you go with COBRA.
You must be enrolled in a high-deductible health plan (HDHP) and have no other health coverage to qualify for an HSA. An HDHP is a health plan with a high annual deductible – $1,400 for an individual and $2,800 for a family as of 2020. FSAs have no eligibility requirements.
The contribution limit for a health savings account in 2020 is $3,550 for individuals and $7,100 for families. The 2020 FSA contribution limit is $2,750.
FSA funds cannot be invested. However, once your HSA account balance reaches a certain amount, you may invest a portion of the funds.
Why Invest Health Savings Account Funds?
Investing the funds in your HSA account allows the money to grow. This can be an important tool in your retirement strategy. It can be used in combination with other retirement accounts to maximize your income after retirement. A health savings account is triple tax advantaged, which makes it an effective savings and investment account. Advantages include:
Withdrawals for qualified medical expenses not subject to income tax
Tax-free interest earnings and investment growth
How Does It Work When You Invest HSA Dollars?
Various financial institutions have slightly different rules for HSA investment accounts. When you set up your investment account, you establish a defined threshold of at least $1,000. When your balance grows to at least $100 above the threshold amount, you may begin investing. You set up your profile and choose the mutual funds you want to invest in. Funds will be transferred automatically to your investment account after you reach the threshold amount. If you need to use funds in your investment account to pay for qualified medical expenses, you must first transfer the funds back to your HSA.
Investing health savings account funds can be an effective way to boost your retirement planning. With a flexible savings account, you do not have that option. If you need more information about the pros and cons of an HSA or FSA, our experienced agent is happy to help.