289 | FSAs vs. HSAs: Hidden Opportunities for Wealth, Health, and Smarter Spending

[00:01:13] Hollina Wadsworth: Hello, Money Lover, and welcome back to Love, your Money^®. I’m Hollina Wadsworth, Lead Financial Advisor here at Hendershott Wealth Management^SM. And I’m borrowing the mic from Hilary today to talk about two often overlooked tools that can have a surprisingly big impact on your financial plan. Those are FSAs and HSAs.

[00:01:39] Now, I know Hilary has been sharing some wonderful information on Ultra Tax Efficient Wealth Management^SM, and I wanted to make sure that HSAs and FSAs were part of that conversation because they’re an important and highly accessible piece of the overall tax planning puzzle. If you’ve ever felt like medical expenses come out of nowhere, or if you feel like your health benefits are just a check-the-box decision during open enrollment, this episode is for you.

[00:02:13] I know from my own experience, because I have a toddler son. I never know when a new allergy or sickness might pop up. I am telling you, daycare germs are real, and we’ve had more than our fair share of unexpected visits to the doctor’s office. HSAs and FSAs can be real lifesavers when it comes to those kinds of expenses, but the truth is that HSAs and FSAs aren’t just expense accounts. When used well, they can be powerful tools to reduce your tax bill, save for the future, and spend in ways that support your life, your values, and your peace of mind.

[00:02:58] So, first, let’s start with the basics. What are FSAs and HSAs? FSAs or flexible spending accounts are employer-sponsored accounts, so you have to be employed by someone who offers them. These accounts let you set aside pre-tax money to cover certain health-related expenses like copays, prescriptions, therapy, or childcare if you’re using a dependent care FSA, which I’ll talk more about that a little bit later in the episode. The key thing to remember is that FSAs are a use it or lose it. And I know that sounds scary, even when I say it out loud right now. What that means is if you don’t spend the money by the end of the year or within your plan’s grace period, it’s gone. But you don’t have to stress too much about that because I’m going to share some tips and best practices later in this episode to help you plan ahead and ensure those saved dollars don’t go to waste.

[00:04:04] Now, let’s talk about HSAs or health savings accounts, because they’re a little different. With HSAs, you need to be enrolled in a high deductible health plan in order to qualify, and those dollars can roll over year-to-year without losing that. So, even if you no longer have an active HSA, you can still use any of the funds that you may have saved in them for you or your family members down the road. The best thing about HSAs is that you get what we call the triple tax advantage, and I do get really excited about this, but what that means is, one, contributions are tax-deductible; two, the growth is tax-deferred; and three, the withdrawals are tax-free if you use them for qualified medical expenses. Sounds pretty great, right?

[00:05:03] I do need to mention that there are a few states that have their own set of rules for HSAs, so it’s definitely important to check with your tax preparer on your state’s rules. For example, I know that California requires you to report any capital gains, interest, or dividends on your HSA accounts annually, so you definitely want to work with your accountant to report that each year. I mentioned that the withdrawals are tax-free if they’re used for qualified medical expenses, but that doesn’t mean they’re locked in and can only be used for that purpose. There is some flexibility in how you spend from the account. However, if you use the funds for non-qualified medical expenses, there’s a 20% penalty.

[00:05:54] With that in mind, I certainly would not recommend using these for something outside of healthcare costs. That 20% penalty is no small number, especially when you consider how comprehensive the list of covered items is. It’s really important to remember that these accounts don’t operate like health insurance, where your options may be limited by the providers or the deductibles. HSAs are far more flexible, and how these dollars are spent is up to your discretion if, of course, the product or service is on the HSA-approved list, which can be found online, but that list is very large. Now, here’s a fun bonus with HSAs that I think many or even most people are unaware of.

[00:06:46] After age 65, you can use your HSA for any expense without the 20% penalty. So, let me explain. Let’s say you wanted to buy a $10,000 boat. I’m sure we would all like to think that a boat could be considered medically necessary. I mean, is anything better for your well-being than being out on the water? I know that’s something my family and I enjoy. But unfortunately, I don’t think the IRS sees it that way. So, just like an IRA withdrawal, you would pay income taxes on the HSA withdrawals for this boat, but there would be no 20% penalty for using it for a non-medical item. Keeping in mind, this is after age 65, but it sort of poses like another retirement account, which is a really big bonus. But that’s why I often say an HSA is one of the most tax-efficient investment accounts available if you use it strategically. It’s definitely a favorite of mine.

[00:07:58] All right. Now, let’s talk a little more about FSAs and how you can make the most of them. Yes, the use-it-or-lose-it rule can feel stressful. I mean, can you imagine putting a thousand dollars into an account and you forgot to spend it, so that money just disappeared? It doesn’t sound great, but that’s why planning and trying to estimate your medical expenses to the best of your ability is key with this type of account. With a little planning, FSAs can be a smart and flexible way to manage your healthcare costs.

[00:08:34] Now, let’s talk about some numbers. In 2025, the contribution limit for a healthcare FSA is $3,300. If you’re 55 and older, I am not sure where they came up with the age 55, you can make an annual catch-up contribution of an additional $1,000. That money can be used for everything from dental work to glasses to therapy, and it lowers your taxable income. That’s a win-win. When it comes to these accounts, if you accidentally use it for a non-medical or non-qualified item, because let’s be honest, we’ve all pulled out the wrong card out of our wallets before, right? But you can actually just reimburse the account for that amount.

[00:09:27] Employers are technically responsible for making sure these funds are used for only eligible expenses, and sometimes your FSA card won’t even allow you to buy something on it that’s not qualified, but I wouldn’t strictly rely on those guardrails. But I do recommend you monitor your use of the account to make sure you’re playing by the rules. Before we move on to HSAs, I also want to talk about the dependent care FSA. Some employers offer both the dependent care FSA and the healthcare FSA, and you can enroll in both since they’re used for different things.

[00:10:08] If offered through your employer, the 2025 contribution limit for a dependent care FSA is $6,000. And it can be used for things like preschool, daycare, afterschool care, even summer camp, or it can be used for a spouse or relative who is physically or mentally incapable of independent care, and they have to also live in your home. If you’re using a dependent care FSA, just make sure that you are not also claiming those same expenses for the dependent care tax credit, because there’s no double dipping allowed.

[00:10:51] When it comes to FSAs, what I tell my clients is to look at the year ahead and estimate wisely. If you typically have recurring or predictable expenses like monthly therapy, prescriptions, contact lenses are another common one, those are great places to start. I also highly recommend that you set reminders for yourself before year-end to submit receipts and spend any leftover funds intentionally and not in a panic. If you are listening to this episode and haven’t set that reminder yet, just do it. Your future self will thank you.

[00:11:32] Of course, we all lose track of time sometimes. So, if you find yourself in a little bit of that panic mode with a balance to spend as you’re nearing the end of the year, there are some online FSA stores that have a complete list of covered items. You can essentially go shopping to find items you and your family may need in order to utilize those dollars and you might actually be surprised at some of the qualifying items. There’s things like sunscreen, acne products, vitamins, allergy medicines, and even water flossers if someone’s really looking.

[00:12:12] All right. So, now let’s talk about the bigger picture possibilities that come with an HSA. HSAs get a lot of attention for helping you manage near-term medical expenses, but I have already alluded to the fact that I actually get most excited about their long-term potential. If you have the cash flow to have a higher deductible and cover out-of-pocket medical costs without dipping into your HSA, that account becomes a stealth retirement vehicle. And here’s why. Let’s say you contribute $5,000 to your HSA this year, and you invest it, ten years from now, it’s doubled to $10,000.

[00:12:58] If you save your receipt from a medical expense today, you can reimburse yourself later tax-free. That’s like retroactively turning an expense into free money. Remember, after the age of 65, you unlock the ability to purchase whatever you want with those funds without incurring that 20% penalty. Plus, investing in your HSA means it’s growing while you’re not using it. And because that growth is tax-deferred and eventually tax-free if used for qualified expenses, it can honestly be even more efficient than a traditional 401(k) or IRA.

[00:13:41] Let’s talk numbers again. In 2025, on an individual HSA plan, you can contribute $4,300, and on a family plan, you can contribute up to $8,550. If you are 55 or older, you can make a catch-up contribution of an additional $1,000. That’s a lot of pre-tax savings if you max out your plan. With the possibilities that accompany an HSA, it can make some people wonder why anyone would choose an FSA over an HSA. But here’s the thing. In order to qualify for an HSA, you have to have a health plan with a high deductible, meaning at least $1,650 for an individual, or $3,300 for a family plan in 2025.

[00:14:36] And this can change year to year. Therefore, not everyone will qualify for an HSA. A high deductible health plan means higher upfront costs, which may not make sense for everyone, especially if you or your family tend to have frequent medical visits. The trade-off really has to make sense for your life, your health, and I can honestly say that they don’t always make sense for everyone.

[00:15:04] For example, I have a friend who has a son with severe allergies and is frequently at the doctor’s office and with how many medical bills they have, it makes more sense for them to have a low deductible health plan with low copays so they can keep taking care of their little one without having to go into some medical debt. The most robust and effective financial plans take your individual or family circumstances into account and look at how you can play by the rules to create the most beneficial outcome for your situation. And if an HSA does make sense for you, it can be one of the most powerful tools in your financial strategy.

[00:15:49] It’s really important to remember that FSAs and HSAs aren’t just a set it and forget it account. Like every part of your financial plan, how you use them should evolve with your life. It’s also important to note that the IRS doesn’t allow you to actively contribute to both an FSA and an HSA in the same calendar year. You can have an active FSA while still having money in an old HSA account but knowing this can help you decide which might be the right one for you at any given point in your life. If you have young kids, a dependent care FSA, if offered through your employer, might save you thousands a year. Switching to self-employment, you’ll lose access to FSAs, but you might still qualify for an HSA depending on your health plan.

[00:16:44] Even as you approach retirement, your HSA can keep working for you. Whether you are covering premiums or reimbursing yourself for old medical bills, those tax-free distributions help stretch your retirement dollars. Here’s the bottom line. The more you understand how these accounts work and how they can work for you, the more empowered you are to make them part of a bigger, values-aligned financial plan. It’s not about checking a box on a form. It’s about using the tools available to you to build a life that feels financially secure and emotionally grounded.

[00:17:27] Before we wrap up, here’s what I hope you take away from today. FSAs and HSAs aren’t just about managing healthcare costs. They’re about giving you more choice, more flexibility, and more confidence in how you care for yourself and your family now and in the future. If this episode sparked a question or made you wonder how these strategies might fit into your wealth-building plan, we are here to help. You can reach out to our team of fiduciary financial planners. By the way, fiduciary means we always act in your best interest, but you can reach us directly by email at hello@hendershottwealth.com. That’s Hendershott with two Ts wealth.com, or you could head to HendershottWealth.com/contact to schedule a complimentary call so we can review your financial situation and help you make a plan that makes sense and makes your hard-earned dollars go further for you.

[00:18:34] Make sure to mention that you heard me, Hollina, talking about these accounts on the podcast, and we can get all your questions answered. And if you found this helpful, be sure to follow or subscribe wherever you’re listening. We’ve got more episodes coming on smart, empowering wealth-building strategies to help you love your money and live your life with confidence. Until next time, take care of your health and your wealth so it can take care of you.