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Future Healthy: Why we moved to an HSA-qualified HDHP
Last year, my husband and I decided to open a dependent care FSA (DCFSA) so that we could save money on my son's preschool expenses. It was a great decision as it lowered our taxable income and we knew we had the money set aside for a specific purpose.
However, we don't need the account for next school year — my son will get to go to preschool for free (thanks Florida!). That doesn't mean I'm not looking for ways to save money in terms of taxes and other expenses. Our current health plan allows us to open a FSA or an HSA, but we're leaning more towards an HSA. Here's why:
I loved our DCFSA, but it wasn't quite the best fit for our family. As in, we were only allowed to use it for my son's child care expenses. While it served us for the last year, now that we don't need to earmark that money for it anymore, we need to look for other options.
Now, to be clear, a DCFSA isn't the same as a standard health care FSA, so let's not get confused. This point was simply to highlight how different accounts can serve varying needs, depending on the family.
That said, while a traditional FSA is also a great option, for some it can be more restrictive than an HSA. Most notably, with how you need to use your funds within a calendar year and it's gone. Sure, some plans allow you to roll over up to $500 or give you a grace period to use up your funds, but that may not be flexible enough for you. What if you end up with more than $500 left over? Or you want to save up more money?
If you're considering making the move from a FSA to a high-deductible health plan with an HSA, keep this flexibility in mind. If you don't have fixed health care expenses and want the ability to set money aside in case of larger expenses, an HSA could be the best choice for you.
But don't let that deter you from exploring FSAs -- these accounts are perfect for a lot of people. For example, if you have immediate needs at the beginning of your plan year, FSA funds are available in full on day one. If that's something that fits your expected health spending, an FSA might be the right choice.
As someone who is obsessed with maximizing their cash, the ability to invest my money in my HSA is really appealing. Of course, this will depend on your specific HSA, but once you reach a certain balance, you can invest a portion of your money into an investment account (like mutual funds).
This can be a really appealing option because your money can make money, especially if your money is going to sit there indefinitely. With an FSA, you don't really have this option.
Emergency funds are there if needed
Think of having an HSA as a long-term benefit, compared to an FSA where you need to plan out your purchases within a calendar year. If you leave your employer or are unexpectedly let go, your FSA funds are gone with limited exceptions.
With an HSA, that's not the case. The money is there until you decide to take it out. And considering the fickle nature of my line of work — freelance writing — I want to be able to have a sizable emergency fund in case work slows down or something happens to my husband's job. Having an HSA can help because I can pay for COBRA during those lean times or I can get my qualified medical expenses reimbursed.
As I'm making this transition away from an DCFSA, and still debating whether a standard FSA or an HSA is the best fit for the coming year, I'll be weighing the benefits of each. If you're making the same decision, make sure to look at your financial situation so that you can shift your mindset from FSA to an HSA owner.
And remember that just because this situation makes sense for me, doesn't mean it will make sense for you. We're big proponents of HSAs and FSAs around here and know the clear benefits of both. Whichever avenue you choose, taking the time to set aside pre-tax dollars for your future out-of-pocket medical expenses is the way to go.
Whether it's for covering medical expenses, or planning bigger investments, our Future Healthy column will help support your path to retirement, no matter where you are on the journey. And for the latest info about your health and financial wellness, be sure to check out our HSA Learning Center, and follow us on Facebook and Twitter.