Hack Your Employer’s Tax-Advantaged Medical Accounts

Let’s talk about the difference between an HSA versus an FSA. Both the HSA and the FSA are different types of accounts that relate to medical spending, but they’re very different types of accounts. And the purpose of each of these accounts are reflected in their names. FSA stands for “flexible spending account.” It’s an account that’s designed to be spent. The word spending is right there in the name. So you can put money into an FSA for qualified medical or health-related purposes, and yes, you get a tax advantage for putting money into an FSA. But if you do not use that money by the designated deadline, then you lose it. Oftentimes, that deadline is the end of the calendar year, but there have been some exceptions to that in the past, so check with HR to find out specifically when that deadline is. But remember, it’s not meant to be there forever. It’s meant to be spent.

An HSA is different. An HSA is a health savings account. So, again, the purpose is right there in the name. It’s money that’s meant to be saved, and you can hold onto it for the long term. So, you can put money into an HSA when you are 25 years old, and you can still have that same money, assuming you have no desire to spend it on qualified medical expenses. You could still have that same money when you’re 65 years old. So, I love the HSA for a few different reasons. When you put money into an HSA, that money is tax-deductible, meaning that you can deduct the money that you put in from your taxes. When you spend money out of an HSA on a qualified medical expense, that money that you spend on qualified medical expenses is tax-exempt. So, you get double tax treatment. You get a deduction on the money that’s going in and you get an exemption on the money that’s coming out as long as you’re spending that money on qualified medical expenses.

And, if you decide not to spend that money on qualified medical expenses, what you can do, depending on what institution is holding this money, you may also be able to invest this money. Those investments grow and compound and if you don’t end up spending them on qualified medical expenses, then when you reach the appropriate retirement age, you can draw down money from your HSA to spend on literally anything you want. You can treat it essentially like money that’s inside of a 401k. This is referred to as “HSA hacking.” People who have enough money that they can pay out of pocket for qualified medical expenses will choose to just pay out of pocket for qualified medical expenses and keep their money inside of their HSA so that that money can continue to grow in a tax-advantaged account. So that HSA essentially gets used as a defacto additional retirement account.