### Understanding a Flexible Spending Account (FSA)
Recently, my wife and I renewed our medical flexible spending account, and while it might sound trivial, we’re pretty thrilled to see an extra $50 to $100 in our checking account every two weeks. Even though we’ve been using these plans through her employer for a while, it always surprises me when I meet other couples who either don’t use them or don’t even know they exist!
Most married couples or families can relate to the endless medical or daycare bills that need to be paid. This is where a flexible spending account can be incredibly useful to better manage your finances. Here’s a straightforward explanation of how an FSA works and how it can save you money on these expenses.
If you find yourself spending a decent amount on medical bills or daycare, you’ll be glad to know there’s a government program designed to help with these costs. It’s called a flexible spending account or FSA. There are many types of FSAs, but the most commonly used ones are for medical and dependent care expenses. If your employer offers an FSA as part of their benefits plan, you can get a tax break. Here’s how it works:
1. **Election:** Decide how much you want to contribute to your FSA. For example, you might elect to put $5,000 into your account for medical and dependent care expenses.
2. **Payroll Deduction:** Much like a 401(k), the money is taken out of your paycheck before taxes. Over 26 pay periods, that means $192.31 per paycheck would go into your FSA.
3. **Reimbursement:** Throughout the year, you request reimbursement for eligible medical or daycare expenses, and the FSA funds pay you back.
4. **Tax Savings:** The money you allocate to an FSA is not taxed, which means more money stays in your pocket.
The maximum contribution for a medical FSA is $2,500 and $5,000 for dependent care FSA.
For example, if you make $60,000 per year:
– **Without FSA:** $60,000 gross income, minus 25% taxes, leaves you with $45,000 net income, which you use for all your expenses, including medical and daycare.
– **With FSA:** $60,000 gross income, minus $5,000 FSA contribution, leaves $55,000 gross income. After 25% tax, you have $41,250 net income. Adding back the $5,000 reimbursed by the FSA gives you $46,250 in actual income, saving you $1,250!
Now, let’s say you have $10,000 in daycare costs for the year. Using an FSA, you could allocate $3,750 of normal income (untaxed) to equal the $5,000 gross income required for the FSA, resulting in considerable savings.
However, there’s a catch: FSAs operate on a “use it or lose it” basis. This means if you don’t spend all the money you elected to contribute, you lose the remaining balance. Therefore, it’s crucial to estimate your expenses accurately to avoid losing your hard-earned money.
Unfortunately, you can only set up an FSA if your employer offers it. If you’re interested, check with your HR department to see if it’s available. If not, consider encouraging them to provide this benefit, as it also gives the employer a tax break.
Employing a flexible spending account can provide significant financial relief for families looking to maximize their spending power.
