10.12.2007

Frugal Fridays: FSAs

I know, it's boring. Flexible Spending Accounts are about as interesting to talk about as moss on a log, and discussions on it are just invitations for a nap. Bear with me.

What are Flexible Spending Accounts?

Flexible Spending Accounts (FSAs) are special, tax-free accounts that set up by the government. The account is similar to a 401k in that a specified amount (that you decide) is taken from your paycheck before taxes are taken out, and put into an account to be used for a specified purpose. In the case of a retirement account, the money is (practically) inaccessible until the owner is retirement-age. However, the entire amount scheduled to be put into an FSA over the course of the year is accessible to the owner at the beginning of the year, and must be used within that year, or it will be lost.

You mean, more money being taken out of my paycheck?!

Yes. And that's OK, promise :) You can spend the money on many, many health-related costs, including doctors visits, copays, medicine, and even some little things like sunscreen & band-aids!

So, how does this help me?

Without an FSA, you're surely budgeting, right? Let's say you're putting $500 into your budget for the year for health expenses not covered by health insurance. That's $500 after taxes, which translates to $675 before taxes (assuming a 25% tax rate)- the money you actually worked for. You know that you're going to spend AT LEAST $500 on health-related expenses this year, so, if you put that $500 into an FSA instead of a line on your after-taxes budget, you're going to have $500 handy for your purchases, AND over $130 (the $175 difference, after taxes) more in take-home pay that can be put toward other pursuits. Or, to think about it another way: if I buy $5 allergy medicine with FSA funds, I'm only spending the equivalent of $3.75 of after-tax pay. Twenty-five percent off! All the time! And no coupons to clip!

What if I don't use all my FSA savings?


You lose it. Be conservative in your budget for this.

I bring all this up because, last year, we were new to the FSA world, and tried to figure out a yearly budget to plan to put into an FSA. Well, just a few months into the year, thanks to the costs of a few prescriptions, we were almost sure we had exhausted the account, and we began just pay out-of-pocket, as we would have if we didn't hav an FSA. Well, our accounting was wrong, and we have about $100 left in the account, to be used before the end of the year. I'm tempted to get a CVS ECB card started with qualifying purchases, but decided its wiser to dig through files & find old receipts that we could be reimbursed for.

A summary:
- Use an FSA, if you have one available. You'll save money.
- Budget conservatively for an FSA. Don't put more in the account than you're sure you'll use.

As I said, I'm new to this, and these are just my preliminary observations and understandings. What do you guys do? Do FSAs work for you?

See more frugal tips!

4 comments:

Kristen said...

I hear a lot about this because my parents use one (and have for a while) and so towards the end of the year, if we have money, we may go ahead and get contacts or the like. I passed this blog on the them to read :)

And thanks for the article you linked on my blog. Interesting...that's all I can come up with right now on that.

Erin said...

We have an FSA as well and are loving all the money we get back from it pre-tax especially with all the Walgreens and CVS deals I am buying as well (Beano and Tylenol!). Makes them even better than free. One extra tidbit about them -- Walgreens (and maybe other stores) puts an 'F' next to any purchases that are eligible for an FSA reimbursement.

Matt said...

We have an FSA at work, and I've really liked having it. I agree that it's a good thing to have. With our budgeting, I've tried to shoot for my post-paycheck reduction due to FSA withholdings to be about what we expect to spend on health-related expenses. So, if I expect to spend $120 (that'd be nice) on medical stuff in a year, I would feel comfortable setting my FSA contribution to $12 per month, or about $144 per year. That way, there's a bit of a buffer if my budget misses something or if something unexpected happens. So if I hit my budget, I'm even. If I go over, I'm ahead. I guess you could undershoot that a little, say have $11 taken out per month, so that your take home for the year is only dropped by $90 or so, and you have $132 available.

Brett said...

For a couple years, we took part in my work sponsored FSA. I can definitely see the benefit to it and how the tax savings can really add up. At the time, though, there was only my wife and I in our household and our planned medical expenses were pretty minimal. I think we had $13 a paycheck (or, maybe, that was per month) taken out. Invariably, we'd wrap up the year by scrambling to find and submit receipts for contact lens solution to get the money back out. Even then, it wasn't exactly a huge tax break.

Unfortunately, it's the unplanned expenses that are real financial killers (dental fillings, stitches, etc) and FSAs can't really help with that simply because they are unplanned. Even the semi-planned expenses (glasses, copays) are hard to estimate.

We eventually decided it wasn't worth the effort for us. Now that we have a child, that might change. We'll see.

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