FSA vs HSA: Which Should You Choose?
FSAs offer similar tax benefits to HSAs—both reduce your taxable income and allow tax-free withdrawals for qualified expenses. The key difference is flexibility. FSAs follow "use-it-or-lose-it" rules; HSAs roll over year to year. If you're healthy and unsure of medical costs, an HSA is usually better. If you have predictable expenses (braces, ongoing prescriptions), an FSA gets you immediate tax savings without risk of losing money.
Understanding Use-It-Or-Lose-It Rules
You must spend FSA money by December 31 (plus a grace period of up to 2.5 months). Unused balances are forfeited. However, 2026 allows a $660 carryover (50% of the $3,300 limit) to roll into 2027. Check your specific plan—some offer only the carryover, some offer only a grace period, and some offer both. This is why underestimating expenses is safer than overestimating.
Eligible Expenses for FSA and Dependent Care FSA
Healthcare FSA covers medical, dental, vision, and some over-the-counter costs (with a prescription or letter of medical necessity). Eligible categories include copays, deductibles, contact lenses, hearing aids, and prescriptions. Dependent care FSA covers child care, preschool, daycare, and summer camp (but not K-12 private school tuition). Check IRS Publication 969 for the full list.
Dependent Care FSA and the $5,000 Limit
If you (and your spouse, if married) both work, you can elect up to $5,000 annually for dependent care costs. This is a separate FSA from healthcare. The tax savings are calculated the same way. If your spouse works part-time and earns less, the limit is capped at their earnings. This is a lesser-known tax break that can save thousands for families with young children.