HSA vs FSA: Which is right for you?

Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are both excellent tools to utilize when accounting for healthcare expenses. Not everyone has access to these accounts, so if you happen to have access to both it’s important to weigh the pros and cons of each when determining benefits for the upcoming year.

These accounts allow for tax free withdrawals on qualified medical expenses, which can make a tremendous impact on a Savvy Solo’s financial health! For example, a single person living in the state of NY making $120k a year would be in the 24% tax bracket for federal, and 6% for state. If this person incurred a medical cost of $1,000 and chose to pay for it out of pocket, the real cost is $1,300 because of the taxes they already paid on that $1,000. That’s an extra $300 this person could put towards debt, investing, or their next vacation!

The benefits of HSAs and FSAs are outstanding, but typically people can’t do both in a given year. Keep in mind that both of these accounts are only intended for the use of qualified medical expenses only. Your HSA or FSA will usually have a list of qualified items/procedures on their website, or at the very least have a number to call. Let’s explore these two options to see which is best for you!

The Flexible Spending Account (FSA) is an employer sponsored savings account that allows employees to set aside pre-tax income to fund qualified medical expenses. These cannot be utilized by the self-employed and are not offered by every employer. The employee will select a contribution amount during open enrollment and generally cannot change this amount throughout the year (barring a qualifying life event). This account is owned by the employer, not the employee. With few exceptions, the contributions made to an FSA account must be used by the end of the year. In most cases, an FSA can be tied to the health care plan of the employee’s choosing, not just a high deductible health plan (HDHP).

The maximum contribution limit for FSAs in 2025 is $3,300. Qualified expenses are subject to the health plan, but generally consist of routine doctor visits, many over-the-counter medications, dental/vision care, and of course many medical procedures. According to this article, “You can use funds from your Healthcare FSA to pay for eligible medical costs for both your spouse and tax dependents,” as long as they are claimed on your tax return. The same is true for HSAs as well.

Traditionally, with an FSA, one submits the medical receipts to make withdrawals from the account to ensure the qualifying expense, but many accounts now offer a debit card that can be used for ease of transaction. Also, 100% of the elected $ amount going towards the FSA can be used right away. Instead of waiting to build up to $3,300 for a medical expense, the employee can utilize this tax-free money early in the year and pay it back through pre-tax contributions from their paychecks throughout the year without paying any kind of interest rate.

There is also a separate account that an employer may offer called a Dependent Care FSA, which can be used for childcare in different ways than just medical expenses and has different rules. I won’t bore you with the details on this one, but it’s worth looking into for the Savvy Solo with dependents looking for additional strategies to save on taxes. Whether it’s a standard FSA, or a Dependent Care FSA, the account is owned by the employer, so generally there are no reporting requirements for the employee utilizing it come tax time.

FSA Pros:

• Not generally limited to HDHP (High-Deductible Health Plans)
• Elected contributions for a given year can be utilized immediately
• Usually, no need to report contributions to IRS

FSA Cons:

• Can only be utilized if employer offers it
• “Use it or lose it” annually (with few exceptions)
• Employee loses unused contributions if leaving company mid-year (account owned by employer)
• Elected contributions cannot change throughout the year (with limited exceptions)

The Health Savings Account (HSA) is a tax-advantaged account that can be utilized by individuals covered by high-deductible health plans (HDHP). Like an FSA, contributions to an HSA are pre-tax (or tax deductible) and can be used to cover qualified medical expenses totally tax free! Unlike an FSA, the HSA is not owned by the employer and unused contributions can be carried over year after year. What’s more? HSA contributions can be invested in the market once the threshold is met.

The simplest and best way an HSA was once explained to me: Think of it as a traditional IRA that can be used, tax and penalty free, for medical expenses along the way. An HSA can be employer sponsored, or self-directed; either way the account is owned by the individual utilizing it. The maximum contribution limits for HSAs are $4,300 for individual coverage and $8,550 for family coverage. Like an IRA, those 55 and older can add another $1,000 to those limits.

HSAs have some strict eligibility requirements to abide by in order to qualify, most notably that a high-deductible health plan (HDHP) is necessary. This will generally lower monthly premiums but have a higher threshold before the insurance kicks in on medical expenses. You also must have no other health coverage, not be enrolled in Medicare, and not be claimed as a dependent on someone’s taxes. Generally speaking, this is not best for someone with ongoing higher medical costs.

Despite the requirements, the HSA is one of the sharpest tools in the metaphorical personal finance shed! It’s triple tax advantaged: tax deferred contributions, tax free withdrawals on qualified medical expenses, and tax free/deferred growth on investments within the account!

One huge benefit of the HSA is that there is no time limit on submitting receipts for HSA withdrawals. Technically someone could pay for all medical expenses out of pocket in a given year and make tax/penalty free withdrawals 20 years later! Of course, the Savvy Solo in this case would have to keep careful records in order to prove to the IRS that the withdrawal was for a qualified medical expense.

At age 65 (instead of age 59-1/2) withdrawals can be made penalty free at which point it would be subject to income tax, just like an IRA. Here’s the kicker though, there are no required minimum distributions (RMDs) at any age, and the funds inside this account can be used tax free on qualified medical expenses as long as you live!

HSA Pros:

• Account is owned by the user, and can carry over year to year
• Contributions can be invested for tax deferred/potentially free growth
• Employers are more likely to help contribute to HSAs over FSAs
• Higher contribution limit for HSAs over FSAs
• Contribution amounts can be changed throughout the year

HSA Cons:

• Limited to those with HDHP (High-Deductible Health Plans)
• Future contributions cannot be utilized when paying for medical expenses
• Record keeping on contributions and withdrawals is necessary
• Incentive to avoid the doctor

The FSA and HSA are fantastic tools for the Savvy Solo to utilize. Let’s point out a few benefits that both of these accounts offer:

• Contributions lower MAGI, thus reducing annual income taxes
• Out of pocket costs on qualified medical expenses can be covered tax free
• Can be used on dependents (in most cases)
• May offer debit card for ease of transactions
• Employers might contribute to either account

Traditional thinking on these accounts has been that younger single people should utilize the HSA, while those with families should utilize the FSA. The HDHP has a feeling of higher risk, especially for those with dependents. I would argue that this is far too generalized, and individual situations might call for one over the other regardless of familial status.

Originally, I pushed back on the idea of the FSA. The “use it or lose it” aspect of the FSA didn’t sit well with me. Plus, HDHPs have a maximum out of pocket limit before health insurance covers 100% of expenses in the case of extreme unexpected medical emergencies. A while back, a conversation a co-worker changed my tune on this a bit. He laid out for me why the FSA made more sense in his particular case, since his dependents had certain ongoing annual medical expenses that would mean more overall out of pocket costs with the HDHP. Score one for traditional thinking.

In another conversation, I spoke with someone who had 5 dependents, and the HSA worked out better for his situation. His other traditional health plan option only offered an 80/20 split with a much higher out of pocket maximum than the HDHP option. His family was in decent health, and only planned on general check-ups for the upcoming year. In his case, the tax-free growth on contributions to the HSA far outweighed the benefit of higher coverage on small expenses that he paid for out of pocket. Not to mention, he’s taking less overall risk with the out-of-pocket maximums being lower. Minus one for traditional thinking.

Instead of looking at it from a dependent’s perspective, it really depends on what employer plans are being offered. Moreover, it depends on what your (and your dependents’) current health costs are looking like, and which of these might be covered by said health plan. If a solo has recurring annual medical costs that would be covered by a traditional health plan, and it involves less overall money out of pocket compared to the higher premiums, than the FSA may be your best bet. For those who are usually somewhat healthy, regardless of age or familial status, the HSA might be the better option. It’s all a math equation based off the individual’s health status and current health care options.

Fidelity reports that the average retiree may need $165,000 out of pocket to cover health care expenses 😬. Medical expenses don’t seem to be getting cheaper; this estimation is up 5% from 2023. This may sway the case for the HSA, since FSA funds cannot be carried over into retirement. Not to mention, us Savvy Solos have a propensity towards investing for the future over the here and now.

Unfortunately, there have been many cases where those with an HSA would ignore seeking medical attention when needed while in the wealth building years to avoid spending HSA dollars. Obviously, this can lead to even higher medical expenses down the line, and a lower overall standard of health on the 5POH. Those with an FSA might not hesitate to see a doctor, since those funds need to be used anyway.

Either way, just about everyone (solo or not) would benefit from the tax savings by utilizing one of these accounts. It’s worth taking the time to reach out to your HR department and reviewing coverages compared to your needs in order to determine which route is the best path for you!

Stay classy Solos! ✌️