Both a health savings account (HSA) and a flexible spending account (FSA) allow you to pay for medical care with pre-tax dollars, which reduces the cost. With healthcare accounting for 8.1% of Americans' average monthly expenses, these tax shelters are important financial tools.
Image source: Getty Images. But while an HSA and FSA sound similar, there are important differences between them.
HSAs provide much more flexibility on how you spend your money, while FSAs allow you to pay for both medical care and dependent care with pre-tax dollars. This guide will help you understand how the rules differ when it comes to eligibility, using account funds, and more. The biggest differences between FSAs and HSAs are the following:
HSA vs. FSA eligible expensesHSAs and FSAs have similar rules regarding which medical expenses you can pay for with your contributed funds. For example, you can pay for prescription medications, eye care, hearing aids, most types of dental care, chiropractic care, and most other medical services. However, dependent-care FSAs enable you to pay for many things HSAs do not. For example, you can pay for child care costs including day care, overnight summer camp, housekeeping expenses related to dependent care, and similar expenses incurred while caring for qualifying dependents. Related Investing TopicsThe chart below provides insight into the key differences between HSAs and FSAs so you can learn the rules for each account.
For many people, an HSA offers more flexibility and is a better choice. However, if you do not have a qualifying HDHP and so aren't eligible for an HSA, and your employer does offer an FSA, it may be your best option for paying for healthcare expenses with pre-tax dollars. Here are the key pros and cons of each type of account to consider.
Be sure to consider the advantages and disadvantages of each account type to make the best choices for covering your healthcare needs. The Motley Fool has a disclosure policy.
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