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How Much Should I Save in My FSA?

By on March 15, 2014 in Money

How Much Should I Save in My FSA?A Flexible Spending Account or FSA is a tax-advantaged account that employees can divert some of their pre-tax income into to be used toward eligible medical expenses.

That’s a mouthful.

Essentially with an FSA from your employer you can set aside part of your income each year and as long as that money is used on certain medical expenses you never pay income tax on the income you put into the FSA.

FSAs are similar to Health Savings Accounts (or HSAs), with a few critical differences.

What is the Difference Between a FSA and a HSA?

Both are used as pre-tax deductions. Both are used for eligible medical expenses.

However, there are two key differences:

Annual Contribution Limit

Health Savings Accounts come with much higher annual contribution limits: $3,250 for individuals and $6,450 for families. That is a lot of money you can set aside for healthcare costs and never pay income tax on it.

FSAs are currently capped at $2,500 per year. This is a change as of 2013. In previous years there was no cap but most employers set a cap of $5,000.

The new cap was put in place to prevent taxpayers from avoiding tax by dropping a large portion of their income into the FSA.

Use It or Lose It

With an HSA you can roll the money over year to year and never lose it. That means you could wait 20 years to use dollars you set aside today — and didn’t pay tax on — on eligible healthcare expenses.

As it currently stands, FSA account holders must forfeit any unused FSA money at the end of the plan year. (Some plans allow you a grace period for a few months into the following year to use up all of the money.)

That may change as Congress and the Treasury Department asked for comments on FSA rules. As it stands right now it is extremely frustrating for FSA users. The dollars they forfeit go back to the employer or the plan even though it is that employee’s hard earned income.

How Much Should I Set Aside in My FSA?

The two big differences above bring up an interesting question: exactly how much money should I set aside into my Flexible Spending Account?

If you are certain you can spend $2,500 on the list of eligible medical expenses this year, there is no harm in going ahead and contributing the full amount.

The problem becomes when you aren’t sure you’ll spend that much. If you only spend $1,500 and contribute $2,500 you will be panicking at the end of the year to find some use, any use, for that last $1,000. If it goes unused by the end of the year you lose that remaining cash (unless the government changes the rules).

If that’s the case it is better to start out small with your FSA contributions to get a better feel for how much you will actually need to have set aside in a given 12 month period.

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