Why Doing an FSA Makes More Sense Than Ever

Why Doing an FSA Makes More Sense Than Ever
Image Credit: Abigail Batchelder / Flickr

There’s a little used benefit most employers offer called a flexible spending account (FSA) for health care. Not familiar with FSAs? Here’s why you should be…

How FSAs work

Here’s how this thing works: With an FSA, you have money deducted from each paycheck that goes into a savings account. The money that’s deducted is never taxed. You can put aside up to $2,550 a year and the money in the savings account can be used for any eligible medical expense.

Unfortunately, only 1 in 5 or 1 in 6 people (depending on who you are believe) who are eligible to do an FSA through their employer actually do it. But more people should, because you get to pay for medical expenses with pre-tax dollars instead of post-tax dollars.

Many people are scared off by the old rules that governed FSAs. It used to be that you had to use the money you put aside in a calendar year or you would lose it. But now employers are allowed to let you carry $500 forward year to year.

Now that most of us have pretty significant deductibles, FSAs make more sense than ever.

Back when we had the old ‘use it or lose it’ rules, people used to go on a shopping bonanza buying OTC meds during the last week of the year to use up their money. But the use of your pre-tax money for un-reimbursed purchases of prescription meds was restricted in 2011.

Plus, there’s no more reason for that mad end of the year rush because you can now carry $500 forward each year.

Remember, having the ability to divert money tax-free is really powerful. And the higher your income, the more doing an FSA makes a great deal of sense for you.

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