HSA or FSA? The Best Choice May Depend on Your Retirement Plans.

There’s no denying that healthcare costs can sometimes be a burden. Whether it’s visits to the doctor, appointments with specialists, prescriptions, procedures, or other medical expenses, these costs can quickly add up and strain a budget.

Although many factors contribute to setting prices beyond most people’s control, using tax-advantaged accounts like a health savings account (HSA) or flexible spending account (FSA) can help ease the financial burden.

Both HSAs and FSAs help you pay for healthcare costs in a tax-advantaged way, but they operate very differently. One isn’t “better” than the other, but the right choice for you largely depends on how you plan to use healthcare today and how you plan to use it in retirement.

How an HSA works

An HSA is a tax trifecta when it comes to saving for healthcare expenses. Your contributions are tax-deductible, they get to grow tax-free, and withdrawals are tax-free, as long as they’re for qualified medical expenses. Examples of qualified medical expenses include doctor visits, various exams, medical equipment, treatments, and dozens of others.

To be eligible to contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP) and meet the minimum deductible threshold and maximum out-of-pocket threshold. If your plan is just you, the minimum deductible is $1,650; if it’s a family plan, the minimum deductible is $3,300. The maximum out-of-pocket is $8,300 for a self-only plan and $16,600 for a family plan.

The HSA contribution limit for 2025 is $4,300 for a self-only plan and $8,550 for a family plan. If you’re age 55 or older, you can add a $1,000 catch-up contribution. Most plans allow you to invest HSA cash once it surpasses a certain amount.

Using funds in your HSA for non-qualified medical expenses will result in the withdrawn amount being taxed (at your income tax rate) and a 20% penalty. After age 65, you can use HSA funds for non-qualified medical expenses without the 20% penalty, but you’ll owe taxes on the withdrawn amount.

How an FSA works

Unlike an HSA, which you can keep regardless of where you work, an FSA is tied directly to your current employer (this unfortunately means self-employed people generally don’t have access to one). You choose an annual amount to contribute during open enrollment, contributions come out of your paycheck pre-tax, and you get tax-free reimbursements for eligible expenses.

In 2025, the maximum amount you can contribute to an FSA is $3,300. Some employers allow carryovers, letting you roll up to $660 into the next plan year, while some offer a 2.5-month grace period for spending the funds. Employers can choose one of the options, but not both.

It’s important to choose your contribution amount wisely because it’s a “use it or lose it” deal, where it must be used within the plan year (or within the grace period). You’ll also be ineligible to use the funds if you leave your job for whatever reason.

How your retirement plans dictate which may be the better choice

Again, there’s no right answer to which is the better option; just which is the better option for you. However, your retirement plans can help you make your decision.

If retirement planning is the priority and you’re eligible for an HSA, that’s likely the better option because you can invest the funds and let them compound over time. That allows it to act like a secondary retirement account once you turn 65 (similar to a traditional IRA).

If you have predictable healthcare expenses over the next year or so, or are ineligible to contribute to an HSA, an FSA is a good choice because it provides straightforward, immediate savings in the form of reduced taxable income.

Regardless of which you choose, taking advantage of these accounts is a good idea. If you’re going to be spending on healthcare expenses, you might as well get a tax break while doing so.