HSA vs. FSA: what you need to know about their use in retirement

It’s a great idea to know the plans you’ve been spending money on for so many years. It’s the three-letter words we actually love — HSA and FSA — that keep dollars out of our hands. theirs. Your Health Savings Account, or HSA, and Flexible Spending Account, or FSA, can be great tools as retirement approaches. The thing is, these plans are meant to help us with our day-to-day medical expenses, but they can become even more valuable in retirement. First, we need to see what HSAs and FSAs are and how they work in order to see how they can help us. Do you know how your expense account works?


What is an HSA?

Quite simply, it’s a health savings account. An HSA is a financial account that helps you save pre-tax money for eligible healthcare expenses. To qualify for an HSA, you must have a high-deductible health plan. Not all health insurance policies may qualify for the use of an HSA. The guidelines change every year and, from 2022, they are:

Minimum deductible amounts $1,400 Individual / $2,800 Family
Maximum disbursement limits $7,050 Individual / $14,100 Family
HSA contribution limits $3,650 Individual / $7,300 Family
2022 Guidelines

You can use your HSA funds for eligible healthcare expenses, including:

  • Most dental and vision
  • Visits to the doctor
  • Hospital service
  • Preventive care
  • orders
  • physical therapy
  • Laboratory tests
  • Durable medical equipment
  • Addiction treatment

How it works?

Once you’ve launched your high-deductible plan, you can start contributing to the account. You can usually do this through your bank or your employer. You are limited to an annual contribution of $3,650 as a single person or $7,300 as a family, as noted above. A big detail about HSAs is that you actually own the policy and the money in it. The money you invest, as mentioned earlier, is also paid out tax-free. These funds can also be invested in certain cases and the interest you earn is also tax free. You can withdraw funds in a snap with a 10% tax penalty.

At age 55, you can contribute even more to your HSA by adding an extra $1,000 each year to your contribution. These are considered “catch-up” contributions.

If you are under age 65, you can use the funds for eligible health expenses listed above. On the other hand, if you are over 65, your plan is fully mature and you can no matter you want with it – as if it were a retirement account. So, all those valuable tax-free contributions are yours to do as you please. I suggest finding a good destination on Travelawaits.com (wink).


What is an FSA?

Like the HSA, an FSA, or flexible spending account, is a health savings account that has certain tax advantages. All funds deposited into this account are also tax-exempt and do not contribute to Social Security or Medicare when withdrawn. The amount you can deposit each year has limits, just like the HSA. As of 2022, the minimum contribution amount is $120 per year and the maximum has been increased to $2,850 per year. Your employer can even match your contribution up to 100% and you can have an HSA and an FSA at the same time.

The major drawback of the FSA is that it is a “use-it-or-lose-it” account. Meaning if you don’t use everything of your funds annually, they are absorbed by your employer.

How do they work?

FSAs are only offered by employers, unlike the HSA, where contributions are deducted from your salary. You don’t even need to participate in group health insurance on your check to participate in the FSA program with your employer. Your employer just needs to have some sort of health insurance plan available in order to offer an FSA.

An FSA can pay for a wider variety of situations than an HSA, which only pays for health-related activities. You can use your FSA to pay child care expenses with an FSA for dependents, for example.

When it comes to “use-it-or-lose-it”, it is very important to correctly estimate your annual health insurance costs. You only want to put in what you can take out in a year. Be sure to use an FSA calculator to estimate your contribution; once you have set the amount, you cannot change it. A consolation is that you also get one of two options if you have money in your account at the end of the year:

  • 2.5 months to spend the remaining money
  • Carry it over for up to $500 to spend next year

Pro tip: I suggest you check the amount corresponding to your employer on your FSA and use it when calculating your medical contribution. In some cases, there is more than one option when considering FSA plan availability.

Having both plans can be a good solution, especially when combined. The FSA is not ideal for retirement savings, but it offers better tax savings than the HSA. You pay no federal income tax or payroll taxes on the payroll you contribute. Plus, they can help you save money when your employer contributes to the plan.

The FSA can help by giving you more savings capacity when you are working, but the HSA offers more after you retire with more investment options. If you have access to an FSA through your employer, I strongly recommend that you take advantage of it for your day-to-day medical expenses. You can then use your HSA for more important situations that may arise later. If you eat your broccoli and take that daily walk, you may be able to use the HSA funds for your healthy retirement.

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