In Focus – SCCCU Blog

Last year, healthcare spending grew a whopping 8.2% to $5.3 trillion, according to the Centers for Medicare & Medicaid Services. Per person, healthcare spending hit $15,074 in 2024, with a further 7.1% increase expected in 2025.

Unfortunately, these costs will likely only grow as we age. That’s why we need to plan for these costs, tucking away as much as possible during our working years. There are a few ways we can do this, including using Health Savings Accounts (HSAs) for both short- and long-term needs, and health care Flexible Spending Accounts (FSAs) for short-term needs.

It’s essential to know the difference between these two accounts because you can't use them both simultaneously (although if you have an FSA for dependent care expenses, they can overlap). Here’s a look at the most significant differences between these two types of accounts and how to figure out which may work best for you.

The Main Differences

The most significant difference between a healthcare-focused FSA and an HSA: Your HSA rolls over from year to year, while an FSA doesn’t. That means people with an FSA generally must “use the money they put in annually or lose it,” so the smart move is to put only the amount of cash into the account you’ll spend within a calendar year. Conversely, the money you put into your HSA can be used throughout your lifetime, so you can contribute up to the allotted dollar limit every single year and know the money will be there when you need it. (You may also be able to invest it for growth, which isn’t an option in FSAs.)

So, why isn’t everyone jumping on the HSA bandwagon? Not everyone qualifies. To be eligible, you must have a high-deductible health insurance plan. For 2026, that’s defined as a health plan with an annual deductible of at least $1,700 for individual coverage or $3,400 for family coverage, according to the IRS.

Typically, you can get an HSA through your employer, or you can open one on your own at a financial institution. But, even if you get the account through your employer, the account (and the funds in it) are portable, meaning you can take them with you if you change jobs. Meanwhile, eligibility for an FSA means working for an employer who offers one — you can’t open one on your own.

What They Have in Common

• Contributions to both HSAs and FSAs are made with pre-tax dollars, meaning they lower your adjusted gross income (and therefore your tax bill). If you fund an HSA or FSA through your employer, the money is taken out of your paycheck and deposited into the account before taxes are taken out. If you set up and contribute to an HSA on your own and not through an employer, your contributions are tax-deductible.
• The government sets maximum limits on how much you’re allowed to save in HSAs and FSAs. In 2026, the Internal Revenue Service’s contribution limits for an HSA are $4,400 for singles and $8,750 for families. In 2026, the cap on contributions for FSAs is $3,400 for individuals.
• Withdrawals both HSAs and FSAs are tax-free as long as the money is spent on qualified out-of-pocket medical expenses. You’ll pay a penalty (and taxes) if you use the money on non-qualified items until you hit age 65. From that point (and beyond), you’ll still be taxed on HSA withdrawals, but you can use the money for anything, penalty-free. In this way, HSA withdrawals after age 65 are treated like withdrawals from 401(k) and other traditional retirement plans.

Other Ways HSAs and FSAs Are Different

• Some HSAs offer investment options, meaning that the money you have in your HSA can be put into different investments (mutual funds, certificates of deposit, bonds, even stocks). FSAs have no investment component, and your savings earn no interest.
• Because the FSA has “use it or lose it” rules, if you don’t spend the money in the account within the year, the money is lost. Although some employers will stretch the expiration date into the first few months of the following calendar year, in general the money in your account will expire. Check with your employer to make sure you know your deadline.
• You’ll never lose your money in an HSA — the money is yours for life, even into retirement, which is why many people use them as an investment vehicle. Plus, the IRS doesn’t require you to take required minimum distributions (RMDs) from HSAs once you’re in retirement.
• Contributions to an FSA must take place during the same calendar year (January through December) that you’re required to use the money. Meanwhile, because HSA contributions don’t expire, they are allowed from January through the tax due date the following year.

HSAs Can Be Used for Retirement, Too

As we mentioned, an HSA is not only a vehicle to cover medical expenses, it’s also a savvy way to stow away cash for retirement. Unlike other investment vehicles that are taxed at various points along the way, your HSA money is always your money — tax-free! The genius of using an HSA is that you save your money pre-tax, invest it tax-free, and even withdraw it tax-free for eligible healthcare expenses. That’s why if you can afford it, you should contribute the maximum every year to your HSA.

And here’s the most exciting hack. If you don’t need to pull money from your HSA to pay for out-of-pocket healthcare expenses, you can let it grow and use other money (money on which you’ve already paid taxes) for that. Then, you save all those receipts for care and other medical expenses. And when you eventually pull the money out of the HSA, you write it off against those expenses — no matter how long ago they occurred.

Protect Yourself with a Smart Healthcare Strategy

As healthcare costs continue to rise, protecting the rest of your wealth becomes even more critical. For medical care, you want your first line of financial defense to be your HSA — not the money in your IRAs and 401(k)s. That’s why having a pool of money earmarked for medical expenses can spare your other accounts from taking an unnecessary hit and help your retirement savings last longer.