Are HSA or FSA Subject to Federal Income Tax?

Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are popular options for managing healthcare costs, but many people are unsure about their tax implications. When it comes to federal income tax, both HSAs and FSAs work differently:

HSA:

• Contributions made to an HSA are tax-deductible, reducing your taxable income.
• Interest or investment earnings in an HSA grow tax-free.
• Withdrawals used for qualified medical expenses are tax-free.
• If you withdraw funds for non-qualified expenses before the age of 65, you'll incur a 20% penalty and pay income tax on the amount withdrawn.

FSA:

• Contributions to an FSA are also pre-tax, decreasing your taxable income.
• Withdrawals used for eligible medical expenses are tax-free.
• However, FSAs are subject to the
  

  When it comes to managing healthcare costs, understanding the tax implications of Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) is crucial. Both options can offer significant tax benefits, but there are important differences to note.

  HSA:

  • Not only are contributions tax-deductible, thereby lowering your taxable income, but carrying savings into retirement can also be a strategic approach to long-term healthcare expenses.
  • The ability for funds to grow tax-free through interest or investments makes HSAs an attractive option for future medical needs.
  • Moreover, tax-free withdrawals for qualified medical expenses allow you to maximize your savings without a financial burden.
  • However, if you’re under 65 and use funds for non-qualified expenses, be prepared for a 20% penalty, in addition to the income tax you'll owe.

  FSA:

  • Like HSAs, contributions to FSAs are also made with pre-tax dollars, reducing your taxable income.
  • Enjoy the advantage of tax-free withdrawals for eligible medical expenses, yet keep in mind that FSAs typically impose a “use-it-or-lose-it” rule, meaning any unspent funds may be forfeited at the end of the plan year.