Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
This week’s episode starts with a discussion of open enrollment, including what to consider when signing up for health care insurance and other benefits.
Then we pivot to this week’s question from Clemente in Denver. They ask, “Which is better, an HSA or an FSA?
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During open enrollment, many employers offer workers a choice between a flexible spending account or a health savings account. Both accounts allow you to put aside pre-tax money for health care, typically with deductions from every paycheck, but they differ in some important ways.
The FSA contribution limit for 2021 is $2,750, and the money must be used within a certain time frame — generally by the end of 2021, although many plans allow you a few months’ grace period.
HSAs have higher contribution limits — $3,600 for people with “self only” coverage and $7,200 for those with family coverage — plus there’s no “use it or lose it” factor. You can roll the money over from year to year. You’re also allowed to invest the money, which can grow tax-deferred. Many people view their HSAs as supplemental retirement plans.
To fund an HSA, you must also sign up for a high-deductible health insurance plan. High-deductible plans can be a great fit for the young and healthy, and may also be a good choice for those who spend so much on health care that they’ll easily meet the deductible. But you should have enough savings set aside to cover the deductible, and not be tempted to skip care because you would have to pay for it out of pocket.
Figuring out the best option depends on a number of factors, including how much health care you use, how much savings you have, how much your employer would contribute and how much of a tax break you’d get. HSA Bank has a calculator that can help you compare a traditional health insurance plan with a high-deductible version.
One size does not fit all. People's tax and health care situations are different, so spend some time researching your options.
HSAs are great, but not for everyone. HSAs have a triple tax advantage and some employers seed the savings account with cash. But HSAs require a high-deductible health care plan. An FSA could be a better fit for many people.
Don’t delay. The time to choose and sign up is during your company’s open enrollment period.
More about health insurance on NerdWallet: