It’s time to start planning your financial future, and a part of that is determining how you’re going to cover potential medical expenses. If you’re employed, you should first check with your company to see if there are health insurance choices available to you. If so, you may find HSA and FSA options available.
Since the Affordable Care Act rolled out, people have been trying to figure out what changes they will see to their health care, both in terms of benefits and costs. If you’re not familiar with HSAs and FSAs, then join the millions of others in the same boat. These are two options you can use to maximize your tax savings while putting money aside for future out of pocket medical expenses. Both are accounts you add money to and can be used to exclusively pay for medical expenses. The money in your health savings account and flexible spending account are tax-free. This is one of the reasons why people find them to be attractive.
The Basics
A big problem with FSA and HSA is that they can be a bit complex. The most commonly used option is the FSA, which can be found in a lot of workplace benefit plans. With an FSA, you set aside up to $2,550 of pretax dollars for health care expenses through automatic payroll deductions. You can also have separate FSAs for child care and some transportation costs.
Health savings accounts came about after the rise in medical plans with high deductibles. HSAs offered people an alternative to these health plans. With an HSA, you’re able to contribute up to $3,350 annually for an individual and $6,750 for a family to be used for medical expenses. If you’re 55 or over, it’s up to $4,350. If the money isn’t used by the end of the year, it will roll over to the next. Your money continuously rolls over, accumulating more and more each year you don’t use it. This allows you the option to use the savings for health care expenses you incur during retirement.
There’s no other option that allows you a triple tax advantage. The contributions you make to your accounts are used from your pretax income, the earnings you incur aren’t taxed and you don’t have to pay any taxes whenever you withdraw money from the account (as long as it’s used to pay for health care expenses). In other words, the money is your money. If you wanted to, you could keep it forever.
Now, note that you can’t have both an FSA and an HSA at the same time. The only way this can occur is if your employer offers a limited-purpose FSA. This is specifically used for dental and vision expenses. Those who are self-employed aren’t able to get an FSA. The only way you can get one is if your employer offers it.
There are some employers who offer employees health reimbursement accounts. This is when the employer contributes money for workers to use to cover copays and deductibles. In most cases, these are connected to high-deductible insurance plans, but not all the time. Unlike an HSA or FSA, you don’t own the funds and if you don’t use them, then they’re forfeited.
An HSA can only be obtained if you have a health insurance plan that has a deductible that’s $1,300 or more. If you have a family, then it’s $2,600. There are some HSA plans that have even higher deductibles, some reaching as high as $6,850 for individuals and $13,700 for families. You don’t get benefits from the plan until you’ve paid the full deductible.
Determining the best plan for you will take some deep consideration. Both plans come with their pros and cons. Then you have to determine if you want to opt for higher deductibles in exchange for lower premiums. Just keep in mind you must also factor in coinsurance, copayments and other out-of-pocket costs when considering total costs for health insurance coverage.
What to Expect from an FSA
Flexible spending accounts come with a number of features that you may or may not like. When it comes to contributions, you’ll need to be savvy. You need to try and plan your future medical expenses to make the most of this plan. You can use the FSA to take advantage of pretax dollars to pay for LASIK eye surgery, eyeglasses, contact lenses and copays for typical medications. This year, you can use an FSA to save up to $2,550.
The only way you can get an FSA is if your employer offers it to you. If so, make sure to carefully consider your contribution amount (how much you will be setting aside from each pay check) because you won’t be able to modify it unless your circumstances have changed. One mistake is opting for a high contribution, thinking you’re going to have an expensive medical procedure done, then it doesn’t happen. In this case, you still have to pay the contribution amount, plus you risk losing the money if you don’t use it for other medical expenses.
You’re able to withdraw money from your FSA tax-free, but no more than the amount of your contribution for that year. You don’t have to worry about fees with most FSAs, but make sure to double check the specifics of your plan. No interest is earned on the funds you contribute.
FSAs require you to spend all of the money in the account by the end of the year or it’s forfeited. Some employers allow you to carry over no more than $500 to be used for the following year.
What to Expect from a HSA
There’s no need to pre-determine how much you plan to spend on medical expenses with an HSA account. All the money invested into your HSA is yours, and yours to keep. You can even use the money during your retirement if you choose to. Both you and your employer can contribute to your HSA. The money can be used for medical care or other expenses, but it’s only tax-free if you use the funds for medical expenses.
You can obtain an HSA through your employer or if you’re self-employed, but you must be enrolled in an insurance plan with a high deductible. Private insurers and the health insurance exchange both have plans that are eligible for HSAs.
You’re also allowed to change your contribution amount anytime you want to. Or if you don’t want to contribute anything at all, you don’t have to. You’re only able to withdraw the amount you’ve contributed to the account. There are usually small monthly fees associated with HSAs, which is sometimes paid by your employer. Any unused funds inside of your HSA can be invested into a 401K. If not, it will just carry over year after year until you use the funds.
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