Different Types of Tax-Advantaged Medical Expense Accounts and The Benefits of Each
By Todd I. Youngdahl, CFP®
You may have heard about the benefits of utilizing various tax-advantaged medical savings accounts to save for medical, dental, prescription, or vision expenses. Many employers offer more than one type of these accounts, leaving employees with questions about which one to choose. Read on to learn about three options, and the benefits of each.
HSAs are one of the most popular tools to save for eligible medical expenses if you are on a high-deductible health plan (HDHP). An HDHP has a deductible of at least $1,400 on an individual basis and $2,800 for a family. You own the account, and the funds deposited are invested on your behalf. Funds also carry over from year to year if you do not use them within the plan year. Money gets deposited into the account via salary deductions made on your behalf by your employer, or through contributions made directly from your employer. You can also claim a tax deduction for contributions made to the HSA. Even if you change employers, your HSA will stay with you, and the money deposited into your account will continue to grow tax-free. As a result, HSAs are often used as retirement savings tools as well. Contribution limits for HSAs in 2020 are $3,550 for individuals and $7,100 for families.
FSAs are employer-owned accounts that reimburse you for eligible medical expenses. FSAs are funded by employer contributions or by pre-tax contributions deducted from your salary. Contributions are tax-deductible, and you do not have to report your FSA on your tax returns. You must utilize the contributions to your FSA by the end of the plan year, and you cannot take them with you if you change employers. In 2020, the contribution limit is $2,750 for an FSA.2
HRAs are employer-owned accounts used to reimburse your medical expenses up to a certain amount, which is determined by your employer. You cannot make contributions to the account. Unused funds remain with your employer, and you are not required to report your HRA on your tax returns. Contributions to your HRA may carry over to later years if your employer allows. The money deposited by your employer is not invested. Deposits are tax-deductible to your employer and HRAs do not have any contribution limits.2
HSA: Health Savings Accounts offer flexibility and the ability to achieve lower premiums. At the same time, money invested grows tax-free, giving you the flexibility to use for medical expenses or keep invested for future retirement expenses. The account is designed to grow over time to be applied to large medical expenses when they occur.
FSA: Flexible Spending Accounts can be used with any health plan. They can also be used to pay medical expenses even if funds have not been deposited into the account. You can still achieve tax benefits if you designate your employer to make pre-tax contributions from your salary into the account as well.
HRA: You may not be able to cover as many expenses with a Health Reimbursement Account as you could with a Health Savings Account, depending on what your employer chooses to cover. However, utilizing an HRA is still a great way to pay for medical expenses even though it surrenders some of the tax benefits of FSAs and HSAs.
So which account is best for you? Leveraging any one of these accounts can help make your healthcare more affordable. Compare your available options and seek advice from a qualified financial professional to help you determine the best fit. The most critical factor is deciding which type of account works best for you based on your unique circumstances. Call our office at 703.584.2700 or email email@example.com to learn more.
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