Smart Quiz: Which Type of Account Saves Pre-Tax Dollars?
- Flexible Spending
- Personal Development
- Regular Savings
- Certificates of Deposit (CD)
Answer: Flexible Spending Account
Maybe you just breathed a sigh of relief because all the bills are paid and you have a bit of extra cash, but that sudden intake of air sparked a sharp pain from an impacted wisdom tooth. Or maybe you’re on a first name basis at the ER because one of your kids is a frequent flyer.
Whatever the case may be, the combined costs of medical expenses like copays, prescriptions, dental care, vision services, and medical supplies can wreak havoc on the average budget.
Flexible spending accounts won’t take away those medical issues, but they can help ease the financial pain a bit.
What Are Flexible Spending Accounts?
Flexible Spending Accounts are offered by participating employers to employees interested in putting aside pre-tax dollars. The funds can be used to cover qualifying out-of-pocket medical expenses throughout the year.
During open enrollment, applicants indicate how much of their pre-tax income they’d like to deposit into the account (Up to $2,650 per year as of 2018). This deduction reduces their take home pay and generates tax savings during participating years. The funds can be used at any time for approved medical expenses for the employee, their spouse, or any dependents under the age of 26. Depending on the plan, users are either provided with a debit card or are required to submit receipts for reimbursement after purchase.
Don’t Lose Your Flexible Spending Dollars
Having a flexible spending account is a great way to save money throughout the year and during income tax season. It is also ideal for those who have ongoing medical needs. Yet, some would say it’s not for everyone. With a use it or lose it policy in place, applicants are required to use the funds before the predetermined deadline each year. Depending on which plan is offered, some may be allowed to carry over a balance of up to $500, but not all plans allow for this
If opening a Flexible Spending Account sounds like something you’re interested in, but you’re worried about losing your savings at the end of the annual deadline, there are steps you can take to reduce the likelihood of that happening. Keep track of your medical expenses throughout the year. Every year, users can make adjustments to their contributions. If you over-saved the year before, drop your contributions accordingly to avoid losing your money. If you spent more on medical expenses than you saved, increase your contribution.
Do your homework before making the decision to enroll in a Flexible Spending Account. Consider your current health and average medical costs for the year to determine if this type of savings is right for you. If in doubt, visit Healthcare.gov and IRS.gov, or talk to your financial advisor to learn more about Flexible Spending Accounts and whether or not you should contribute.
~Here’s to Your Financial Health
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