HSAs and FSAs both cover out-of-pocket medical expenses — which one should you choose?

From time to time, you may run into medical expenses that your health insurance doesn't cover. It could be something simple, like eyeglass frames, or something bigger, like hospital fees or diagnostic tests.

That's where a health savings account (HSA) or a flexible spending account (FSA) can make the difference: Both of these accounts are meant to cover qualified medical expenses, but there are significant differences between the two.

Below, CNBC Select breaks down what you need to know about HSAs and FSAs, including how they work, how they differ and which may be the right account for you.

Designed to cover qualified medical expenses, an HSA can either be sponsored by an employer or opened by an individual. To open an HSA, you must:

• Be covered under a qualified high-deductible healthcare plan (HDHP)
• Not be covered by Medicare or any plan that is not a qualified HDHP
• Not be claimed as a dependent

HSA contribution limits in 2023 are $3,850 for individual filers and $7,750 for families.
For 2024, the limits are $4,150 for single individuals and $8,300 for families.

An FSA also allows you to save for medical expenses, but you don't need to be enrolled in an HDHP to qualify. Your employer only has to offer an FSA benefit.

The FSA contribution limit for 2023 is $3,050, regardless if it's for an individual or a family. The limit for 2024 is $3,200.

An HSA has three tax advantages:

• Payroll contributions are pre-tax, which lowers your taxable income amount.
• Earnings grow tax-free.
• You can withdraw money tax-free for qualifying medical expenses, as determined by the IRS.

If you withdraw funds for nonmedical expenses, they are considered taxable income and are also subject to a 20% penalty. After age 65, you are no longer charged the penalty, but withdrawals are still subject to income tax unless for health-related expenses.

Because money in an HSA can be invested and tapped after age 65, it's considered a good tool to build your retirement nest egg.

Unlike most FSAs, the balance in an HSA rolls over from one plan year to the next and your account goes with you if you leave your job.

Like an HSA, an FSA reduces your taxable income by allowing pre-tax contributions. However, you can't invest the money you contribute to an FSA and, if you change jobs, you'll lose any balance.

In addition, the money in an FSA must usually be spent within the plan year or it's sacrificed. (Some employers may allow employees to roll over a small amount or offer a grace period to use funds before they expire.)

Deductions are made from your paycheck throughout the year, but the full election amount is available on day one. If you leave your company before your payroll contributions equal any withdrawals you've made that year, your employer may deduct the difference from your final paycheck.

Except for some limited-purpose FSAs that only cover dental, vision or dependent care, you can't contribute to both an HSA and an FSA. So, you'll have to decide which is best for your needs.

An HSA is most advantageous if you don't have frequent out-of-pocket medical expenses. Because it rolls over from year to year, your money has time to grow. So, If you do get hit with a large medical bill down the line, your earnings should be able to cover the higher deductible. And, any money you don't spend on healthcare can be accessed in retirement without penalty.

You don't have to be enrolled in an HDHP to open an FSA. So, if you have regular medical expenses, it may make more sense. And, while HSA contributions accumulate through the year, funds from your FSA are available in full at the beginning of your plan year.

If you don't qualify for either an HSA or FSA, there are still ways to save up for health-related expenses. A high-yield savings account (HYSA) can earn a sizable return while leaving money readily available. You don't have to be enrolled in a high-deductible health plan and, unlike an FSA, an HYSA isn't tied to your employer and won't vanish at the end of the year.

Wealthfront's Cash Account HYSA has a competitive annual percentage yield (APY) with no monthly fees and a complementary debit card. It makes it easy to save for multiple goals, so you can assign funds to "medical expenses."

Another solid option, Synchrony Bank has no fees and no minimum deposit or balance requirements. Account holders are eligible for a free ATM card and Synchrony will refund other banks' ATM fees up to $5 per statement cycle.

If your primary interest in an HSA is as a retirement savings vehicle, you could open a Roth IRA with a robo-advisor: Betterment can customize portfolios around specific goals or by risk tolerance and time horizon. There are no trade or transfer fees and account holders have access to a high-interest cash reserve and checking account. 

HSA and FSA accounts are both meant to pay for health-related expenses not covered by insurance, but they have significant differences in eligibility, contribution limits, investment options and portability.

Consider your situation before deciding to open either one.

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Catch up on CNBC Select's in-depth coverage of credit cards, banking and money, and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.

Information about the Synchrony Bank High Yield Savings Account has been collected independently by CNBC and has not been reviewed or provided by the bank before publication.