A flexible spending account (FSA) can be a bit scary because there is the possibility of losing money. However, if you carefully plot your course you will not let this happen and you will save some money on taxes. Much more than a Hamilton will come out of this strategy, so listen up and hope your employer has your back on this.
The bad news about a FSA is that you can only get it through your employer. The good news if you have access to one you can save hundreds on healthcare expenses every year.
How it works
During an enrollment period which usually occurs once towards the end of the year or when you start at a new company, you will be able to select how much of your paycheck you would like to allocate to your FSA. For 2016 the limit is $2,550. You then have access to all your FSA money at the beginning of the year. You are allowed to use the money for qualified medical expenses such as doctor’s visits, copays, glasses, and much more. However you can not use it to pay your insurance premiums.
Why is this a good thing?
Even though you are not getting a reduced price for anything you are saving money because you do not have to pay taxes on the money you put into your FSA. If you tax rate is 25% and you put in $1,500 because you intend to have lots of medical spending you are saving $500 because your $2,000 would have been taxed down to the $1,500 you spent on medical supplies.
How much should I put in?
Check with your plan, but for mine I am allowed to roll over $500 toward the next year, anything above that is lost. So putting in $500 would be extremely safe for me, but I put in even more. You know you have certain visits every year, so account for those. For me, I will go to the dentist twice, the doctor twice, and my wife will need a pair a glasses (you can use it for dependents too). With a $25 copay and $300 glasses I could put $400 in my FSA or up to $900 and not worry about it. Personally I put a bit over $1,000 because I’m not sure when I’ll need a prescription or something comes up. If at the end of the year you have too much you can blow it on qualified expenses such as band aids and thermometers. Just because there is a tax benefit you don’t need to overdue your healthcare, but on the opposite way, make sure you aren’t so cheap that you don’t take care of your health.
Happy Leap Day!