Choosing HSA or FSA At Open Enrollment

September 05, 2017

In the past 7 months, my daughter has had two concussions, a bruised ankle, a broken elbow and a black eye from being accidentally hit by a friend. “Accident-prone” doesn’t quite seem to cut it anymore in describing her and our constant trips to urgent care.

In fact, she is so well-known at our local clinic that our conversations with the staff are now about updates on the staff’s kids’ sport and family activities. I am so envious of my colleague Michael, who mentioned that his goal is to have over six figures in his health savings account. With my family, I consider it successful if we have a nickel left at the end of the year.

The medical savings account we use these days

I currently have a Health Savings Account (HSA) where I contribute the maximum amount annually (along with the help of my employer), since if I do not use the funds (although this year, with my daughter’s track record, I probably will) they roll over to the next year indefinitely. I don’t have to spend any time figuring out how much I will be spending on medical expenses, since there is no deadline to spend the money on qualified costs.

One of the benefits I really like is that the funds can be used for medical expenses for me, my husband or my daughter, even though my husband and daughter are not on my healthcare plan. But if we happen to have a year of perfect health, I’m not out the money I put into my HSA because it’s mine to keep for future years, even if in the future, I switch to a plan that’s no longer eligible for HSA contributions.

If you have a Flexible Spending Account instead

When I had a Flexible Spending Account (FSA), I had to be a lot more thoughtful about how much I contributed, since I could only roll over $500 and only for one year. Nowadays technology makes it a little easier to help you decide how much to contribute, but you still have to be careful not to put too much in.

How to determine what amount to elect for your FSA

To determine how much to contribute, I did a search using online banking for any health-related costs like medical, dental, vision and prescriptions. I looked over the past two years to make sure I was getting a good average. I also accounted for unusually high expenses (like our two car accidents within 6 months of each other — so maybe my daughter’s accident proneness is hereditary) to average about how much I spent annually. Since I can rollover up to $500 if I go over, I usually rounded up a little.

Regardless of which type of account you use, make sure you take advantage of the ability to pay for qualified medical expenses tax-free. As my colleague Kelley likes to say, it’s perfectly legal (and totally advisable) to avoid taxes, it’s just illegal to evade them. Take advantage off all the ways to avoid taxes that you can!

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