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HSA and FSA accounts can both help you cover out-of-pocket medical expenses, but which one should you choose? – UnlistedNews

From time to time, you may encounter instances where you need to make a health care purchase that your insurance does not cover. It could be something simple like premium eyeglass frames for new lenses or even something bigger like a dental procedure.

This is where a Health Savings Account (HSA) or Flexible Spending Account (FSA) can make that financial burden feel a little easier. Both accounts are intended to meet qualified medical expenses not fully covered by insurance; however, each has some important differences. Also keep in mind that you can’t contribute to both an HSA and an FSA in the same year, which means you have to choose between them.

Below, CNBC Select breaks down what you need to know about these accounts, including how they work and how to choose the account that’s right for you.

What are HSA and FSA accounts?

An HSA is an account designed to help consumers with High Deductible Health Plans (HDHPs) save for any future medical expenses. To open an HSA, individuals must meet the following criteria:

  • Must be covered by a qualified high deductible health plan (HDHP)
  • You may not be covered by any health plan other than a qualified HDHP
  • You must not be enrolled in Medicare (the health care component of the Social Security program)
  • You cannot be claimed as a dependent on someone else’s tax return

the money in a HSA can even be invested. Because of this, it is not only recommended as a way to save for medical expenses, but also to build wealth for expenses later in life.

An FSA is similar to an HSA in that it allows people to save for medical expenses. One difference is that you don’t need to have an HDHP to qualify for an FSA; your employer simply has to offer you FSA enrollment before you can enroll.

Another big difference is that each account has different contribution limits. The new HSA contribution limits for 2024 are $4,150 for singles (up from $3,850 in 2023) and $8,300 for family coverage (up from $7,750 in 2023). The 2023 FSA contribution limit is lower at $3,050 per account, regardless of whether it is individual or family.

What is a High Deductible Health Plan (HDHP)?

An HDHP is a health insurance plan that, as the name suggests, has a high minimum amount that must be paid before the insurance kicks in and covers the remaining cost of your medical expenses. To be considered an HDHP, the plan must have a minimum deductible of $1,500 for individual coverage and a minimum deductible of $3,000 for family coverage, according to the 2023 guidelines.

How does an HSA work?

An HSA is well known for having three distinct tax advantages: First, this account allows you to make pre-tax contributions, which reduces the total amount of your taxable income. Second, your funds grow tax-free. if you are able to invest the funds in your HSA, this works in your favor as your money grows even if you are not making any contributions.

The last tax advantage is that you can withdraw your funds tax-free for any qualified medical expenses (which is determined by the IRS). If you don’t want to use your funds for medical expenses, you can wait until age 65 to withdraw your funds and avoid incurring the penalties you would normally pay for using this money for non-medical reasons. Just keep in mind that you will still have to pay a tax on these withdrawals.

Unlike most FSAs, the balance in an HSA rolls over every year, even if you haven’t used any of the funds.

How do FSA accounts work?

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Should you choose an HSA or an FSA?

It’s important to remember that you can’t contribute to both an HSA and an FSA at the same time, even if you meet all the requirements for both accounts (some exceptions may be made for limited-purpose FSAs that only cover dental and health care expenses). vision and dependent care FSAs). that cover eligible expenses related to the care of the elderly and children). This means that you will have to decide which account is best for your needs.

An HSA is most advantageous when it does not require frequent out-of-pocket medical expenses. This is because it doesn’t follow a “use it or lose it” policy like FSAs do. This gives your money time to grow, so if you’re hit with a big medical expense in the future, hopefully you’ll have a higher balance capable of covering the bill. Plus, if you never end up using your HSA funds when you’re younger, you’ll be able to use these funds when you retire.

If you have some more regular medical expenses during the year, an FSA might make more sense since money is “use it or lose it” and having more regular medical expenses makes it more likely that you’ll spend the balance before it’s due.

What are some alternatives?

Improvement

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment does not require clients to maintain a minimum investment account balance, but there is a minimum ACH deposit of $10. Premium Investing requires a minimum balance of $100,000.

  • Fee

    Fees may vary depending on the selected investment vehicle. For Betterment Digital Investing, 0.25% of your fund balance as an annual account fee; Premium Investing has an annual commission of 0.40%

  • Cousin

    Up to $5,000 managed free for one year with a qualifying deposit within 45 days of signup. Valid only for new individual investment accounts with Betterment LLC

  • investment vehicles

  • investment options

    Stocks, Bonds, ETFs, and Cash

  • Educational resources

    Betterment offers retirement and other educational materials

Terms apply. Does not apply to cryptoactive portfolios.

And instead of an FSA, you might consider simply opening a high-yield savings account to put money away solely for out-of-pocket medical expenses. A high-yield savings account can be even more attractive for the simple fact that you won’t have to worry about losing your contributions if you don’t use them by the end of the year. Also, the account is not tied to your employer, so you can open it whenever you want.

Sometimes it can seem confusing or disorienting to have to save for multiple goals, so savings accounts that provide a “bucket” feature can be helpful so you can make deposits for specific goals. Wealthfront Cash Account includes this feature so you can create a “medical” deposit and start depositing money. Otherwise, sync bank is another solid option as it offers account holders an ATM card for easy cash withdrawal (not many other banks offer an ATM card with their high-yield savings account).

Wealthfront Cash Account

  • Monthly Maintenance Fee

  • Minimum deposit to open

  • minimum balance

  • Annual Percentage Yield (APY)

  • Free ATM network

    19,000 free ATMs through Allpoint.

  • ATM fee refund

    No reimbursement for out-of-network ATMs

  • overdraft fee

  • mobile check deposit

    Available with the Wealthfront app

advantages

  • Relatively high APY and up to $5 million in FDIC insurance coverage for individual cash accounts.

cons

  • Limited network of cashless ATMs

Synchrony Bank High Yield Savings

Synchrony Bank is a member of the FDIC.

  • Annual Percentage Yield (APY)

  • minimum balance

  • monthly fee

  • maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle

  • Excessive Transaction Fee

  • overdraft fee

  • Do you offer checking account?

  • Offer ATM card?

advantages

  • strong APY
  • No minimum balance or deposit
  • No monthly fees
  • Easy access to ATMs
  • 1 physical branch (in Bridgewater, NJ)

cons

  • No option to add a checking account

Bottom line

HSAs and FSAs are designed to help you pay for any medical expenses not covered by insurance. However, these accounts may not be the most suitable for everyone. As always, you should take into account your personal needs before deciding on one or the other.

If you think neither account makes sense for you, you may consider investing your money on your own or opening one high-yield savings account for medical expenses.

Catch up on CNBC Select’s detailed coverage of Credit cards, banking and moneyand follow us on Tik Tok, Facebook, instagram and Twitter to be updated

Editor’s note: The opinions, analyses, reviews, or recommendations expressed in this article are solely those of Select’s editorial staff and have not been reviewed, approved, or otherwise endorsed by any third party.



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Sara Marcus
Sara Marcushttps://unlistednews.com
Meet Sara Marcus, our newest addition to the Unlisted News team! Sara is a talented author and cultural critic, whose work has appeared in a variety of publications. Sara's writing style is characterized by its incisiveness and thought-provoking nature, and her insightful commentary on music, politics, and social justice is sure to captivate our readers. We are thrilled to have her join our team and look forward to sharing her work with our readers.
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