Did you ever hear the saying that “every penny counts?” That is true in your daily or monthly budgeting and it is certainly true for Flexible Spending Accounts (FSA).
FSAs are a tax advantaged tool that will allow you to save specifically for health care and dependent care expenses. Let me explain….
What is an FSA account?
A flexible spending account is a tax-advantaged tool that can help you save for health and dependent care expenses such as child care, medical needs, and other health services.
Tax-advantaged means the money goes into the account from your paycheck, prior to taxes being taken out. This mean you save money on taxes and have money set aside for eligible healthcare and dependent care expenses.
Each plan year, you need to re-enroll in your FSA. Be aware that funds generally must be used by the end of the plan year, and therefore any money left over is forfeited.
What are the benefits of having an FSA account?
FSAs put your pre-tax dollars to work. Why is this important? Pre-tax dollars means that the money is set aside before taxes (Federal, FICA, and State) are taken out of your paycheck. Setting money aside in this way, before taxes, has two benefits:
(1) Setting this money aside before taxes lowers your end-of-year tax bill. When the money is set aside, prior to taxes, it is though that money never existed.
(2) Because the money is going into the account before taxes are taken from it, you get a little extra – because the taxes were not deducted.
Things to consider
When enrolling in an FSA, you can choose the medical option, or the dependent care option, or both. For a medical FSA, you can set aside between $120 – $2,650 each year and for a dependent care FSA, you can put aside between $120 – $5,000. When you enroll, you will need to know how much to set aside from your paycheck. You should try to get the amount as close to your actual yearly expenditures as possible to avoid having money left over at the end of the term. To assist in figuring this out, you can use a Fact Sheet we developed.
Now that you know what a FSA is, you need to contact your human resources department to set one up. For other helpful information about health insurance visit our Insuring Your Health website at http://extension.umd.edu/insure/consumer-resources.