Money Meets Medicine Podcast
Should I Use My HSA or FSA?
As we head into the final months of the year, which is typically the time of year for open enrollment for benefits, lots of benefit questions inevitably arise – particularly in regards to spending accounts like HSA vs FSA.
- What’s the difference between an HSA and a FSA?
- What are the potential benefits of using these accounts?
- Which type should you use – or should you use both?
We’re tackling these questions and more for physicians who want to make sense of their employee benefits in order to better understand their impact.
HSA vs FSA: what are they exactly?
A HSA (health spending account) is a really special account from an investing standpoint. That’s because it’s a triple-tax-free account, meaning you put pre-tax money in straight from your paycheck. You could put the pre-tax money in just like you would for a traditional 401k, but the cool thing is that it grows tax-free, so when you use it for qualified healthcare expenses, it never gets taxed.
This means that A) Yes, it’s a real investment account with a broker and subject to market performance, and B) it’s the only investment account that never gets taxed – so long as you use it on the expenses that are qualified within the plan.
In a way, this is kind of like a stealth retirement account where you can save money.
Important to know: You must be enrolled in a high deductible plan to qualify for a HSA, so you do end up paying more out-of-pocket for your healthcare expenses in the short-term.
Most beneficial for: Physicians who have the cash flow to sustain their healthcare expenses up until the time that their high deductible is met.
A FSA (flexible spending arrangement/account) is funded by a voluntary deduction from your gross salary that you can use pre-tax and get reimbursed. It’s a similar process to incurring a business expense: you make a purchase on a new laptop for your business, and you can later use that expense as a tax deduction.
Important to know: The funds in your FSA stay fixed throughout the benefit year. So, say you put in $1,500 at the start of your benefit year and six months later it turns out you needed $2,500, you can’t increase the pre-taxed contribution. You’ll need to spend time planning for the upcoming year’s potential medical expenses (as best you can – it won’t be 100% perfect).
Most beneficial for: Physicians enrolled in a regular healthcare plan who still want to pay for healthcare expenses without their money being taxed.
In short, you have a spending account open to you no matter which kind of health insurance plan you choose. You just need to decide which one is best for you at which time.
Curious about a HSA in action?
As someone who has a high deductible plan and a HSA for expenses, I wanted to break down an example of how it works practically for me and my family.
My family deductible is $8,000, so I’ll be paying out of pocket for medical and healthcare expenses up until $8,000. There’s $7,750 I can use from the HSA on qualified healthcare expenses.
It’s an interesting dilemma – if you don’t know whether you’ll have a lot of healthcare expenses, what do you do when a lot of healthcare expenses come up?
Remember: HSA is an investment account.
And because your HSA has the potential to grow beyond the money you’ve put in, I would argue in favor of cash flowing as much of your health expenses as you can. Use your savings, your emergency fund, the cash flow that comes in as part of your paycheck to cover those costs. That way, you save your HSA money so you’re not dipping into the account when the market’s down and guaranteeing those losses.
If you’re able to treat your HSA like a brokerage account, you get the very useful triple-tax-free benefit, and you can save receipts and then turn that money in later.
HSA vs FSA comes down to your current season of life
Ultimately, you have to decide for yourself whether to take advantage of a HSA or FSA. As you’re assessing your options, ask yourself, ”Is this a good plan for me given where I am in life?” For Lisha as a fellow, the FSA suits her needs very well. For me as an attending, the HSA is a better match. The answer will vary based on your financial situation, but the important thing is to have all the knowledge you need to make an informed decision.
Subscribe and Share
If you love the show – and want to provide a 5-star review – please go to your podcast player of choice and subscribe, share, and leave a review to help other listeners find The Physician Philosopher Podcast, too!
You might also be interested in…
Have you ever left a sporting event, following the crowd, and suddenly realized you were walking the wrong way? What if I told you this phenomenon has a name, and it impacts your money, too?
Understanding our own behavior when it comes to finance is essential because it helps us mitigate wrong-for-us decision making around money. Unless you know these roadblocks exist, you can’t do much to stop them from derailing your financial goals.
Last week, we shared why human behavior matters for our financial lives by taking a look at the first 5 out of 10 psychological phenomena that can (and do) affect your personal finance goals: greed, fear, ego/overconfidence, loss aversion, and analysis paralysis.
This week, we’re diving back into behavioral finance (one of our favorite topics) to share five more types of unchecked human behavior that can sabotage your journey to building the wealth you want.
Despite our best intentions, certain emotions can keep us from building wealth. After many years arming physicians with the information they need to achieve financial wellness, I had a significant realization.
Information is one thing – behavior is another.
As the saying goes, money is 80% behavior and only 20% math.
Not only do I want to share important information about personal finance, I also want to help you recognize how certain behaviors can (and do) affect your finances.
Drawing from one of the classic books about investing, let’s go over five common behaviors that could be keeping you from achieving your financial goals.
Many doctors and high-income professionals hire financial advisors for any number of reasons. Either they’re too busy to handle their finances themselves, they don’t really know how to invest, or they want an expert on their side to make sure they’re on the right track.
So allow me to say from the start: I’m not against financial advisors, but I am against doctors (or anyone, really) being overcharged for bad advice.
There’s no shame in asking for help – you just want to get the help you need at a fair price.
You should be equipped enough to vet and evaluate your financial advisor so you’ll know whether they’re working well on your behalf. How can you be as confident as possible they’re acting in your best interest? This episode will help you find out.