Medical-Related Savings Plans: You Can Save Money on Taxes With Flexible Spending Accounts
FSAs can be used to pay for a variety of qualifying medical, dental, and vision costs, but contributed funds must be spent by the end of the year
If you have a health plan through a job, you may be able to use a Flexible Spending Account (FSA) to pay for copayments, deductibles, some drugs, and some other health care costs. Depending upon the extent of your health costs, participating in an FSA can help you save money by reducing your taxes at each paycheck. But be careful. If you contribute more than you spend, your unused funds disappear.
What Is a Flexible Spending Account?
FSAs, also know as Flexible Spending Arrangements, are special accounts that you contribute to throughout the year that help you pay for certain out-of-pocket health care costs. You'll typically use these to pay for medical, dental and vision expenses. If offered by your employer, participation is voluntary.
What Does a Flexible Spending Account cover?
You can use your FSA to pay costs that your health insurance doesn't cover, including co-payments, deductibles, prescriptions, and vision and dental expenses. There are also certain treatments and therapies it can pay for, such as birth control, pregnancy tests, insulin, crutches, chiropractic treatment, and programs to help you stop smoking. But it doesn't pay for insurance premiums or over-the-counter medications without a prescription. The exception is insulin.These funds can also be used for your spouse and your dependents.
Contributions and limitations
Employees can contribute up to $2,750 per year per employer. If you're married, your spouse can also contribute up to the same amount. This money must generally be used within the plan year, but your employer can provide a grace period of up to 2.5 months to use the money. You may also be allowed to carry over up to $550 per year to use the following year. Your employer may grant you either of these options, but not both. It's also not required to offer FSAs at all. In any case, it's important to plan carefully in order to spend what you contribute or risk losing money.
Is an FSA a Good Choice for You?
FSAs are best for those who have ongoing and predictable medical expenses because unused funds are forfeited. These people will probably use all the money in the account before forfeiture. Those who are healthy and/or have few medical expenses have a higher possibility of forfeiting their money, so they may not want to go with an FSA.
It's really a guessing game
FSAs can offer some real tax benefits throughout the year if you don't itemize, which can save you a lot of money. But the flip side is that you have to forecast how much money you expect to use through the year in order to predict how much money to contribute. If you contribute too little, you'll miss out on some tax savings. If you contribute too much, you may find yourself losing the extra unused money. In the end, you need to sit down and get an idea of how much money you would expect to spend on health costs and make a reasonable prediction before setting up a contribution.