An HSA is similar to a Health Care Flexible Spending Account (HCFSA); you can pay for health care expenses from this account before taxes, but the HSA has several notable differences that make it a better way to save for the future.
First, it can only be used when enrolled in a high deductible health plan (HDHP).
While an FSA is set up by an employer and can be used with different types of insurance, the HSA can only be used with paired with a high deductible health plan (meaning there’s a higher amount to cover out of pocket before the insurance kicks in.)
Second, the HSA is known as the “triple tax advantage account.”
You start by putting your money (contributions) in the account before taxes. Next, your contributions (as long as you don’t withdraw them) will grow year over year (via interest or interest investment gains) tax-free. Lastly, when you withdraw money to pay for qualified medical expenses, the money is still not taxed. Paying out of pocket medical expenses can be significantly cheaper to you because of these tax advantages. Read more here on the triple tax advantage of an HSA.
Third, and most important to know, your HSA balance rolls over year to year, they aren’t “use it or lose it” like an FSA.
You own the account, not your employer so your balance doesn’t reset to zero every year like an FSA and you can take it with you if you change jobs. The money in the HSA is yours.
Finally, the annual contribution limits are higher than an FSA; and you can let the balance grow (even investing it) and use the money in the account during retirement to pay for health care expenses. The HSA is long term savings tool compared to the short term nature of an FSA.
An HSA is a great tool but may not be suitable for everyone. If you/your family are generally healthy and want a way to save for future health care expenses in a tax efficient manner, it may be a good fit. If you’re not in good health, expect high medical bills, or have a hard time paying a high deductible, it may not be suitable.