HSA vs FSA: Which Is Right for You?

Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) both let you use pre-tax dollars for healthcare expenses, but they work very differently. Choosing between them — or deciding how to use both — can save you hundreds or thousands of dollars per year in taxes.

The HSA triple tax advantage

HSAs are unique in the tax code: contributions are tax-deductible, investment growth is tax-free, and withdrawals for qualified medical expenses are tax-free. No other account offers all three benefits. To be eligible, you need a high-deductible health plan (HDHP).

The FSA trade-off

FSAs don't require a special health plan, and they're available through most employers. However, they have a critical limitation: use-it-or-lose-it. Any money left in your FSA at the end of the plan year is forfeited (some employers offer a $610 rollover or 2.5-month grace period). This means you need to estimate your healthcare costs carefully.

HSA as a retirement vehicle

Here's where HSAs become extraordinary: if you contribute the family maximum of $8,300 per year and invest it at 7% annual returns instead of spending it, after 25 years you'd have approximately $528,000. After 30 years, over $750,000. After 35 years, over $1,070,000 — all tax-free for medical expenses in retirement, when healthcare costs are typically highest.

Even if you withdraw HSA funds for non-medical expenses after age 65, you only pay income tax (no penalty) — making it function like a traditional IRA with the added benefit of tax-free medical withdrawals.

Decision framework

If you're eligible for an HSA and can afford the higher deductible of an HDHP, the HSA almost always wins. If you're not eligible for an HSA or prefer a lower-deductible plan, an FSA still provides meaningful tax savings — just be conservative in your contribution estimate to avoid forfeiting money.