Suze Orman: Don’t Make This Costly FSA Mistake
A flexible spending account, or FSA, is an employee benefit that allows you to put aside tax-free dollars to pay for qualified medical and dependent expenses. Whereas a medical FSA pays for qualified healthcare costs, a dependent care FSA pays for the daycare costs of children under the age of 13 or older dependents.
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If you have an FSA, personal finance expert Suze Orman says to spend it all before the end of the year.
“As anyone with an FSA should be aware, the money you set aside in an FSA can typically only be used for that given year. If you don’t use it, you likely will forfeit that money,” Orman wrote in a July 25 blog post.
Citing an analysis by the Employee Benefit Research Institute (EBRI), Orman pointed out that about half of the people who had set aside money in an FSA in 2022 didn’t use all the money in the account, and the average amount they forfeited to their employers was nearly $450. And it’s typically younger workers who forfeit more, she added.
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As of Dec. 31, 2022, the EBRI database included over 3.2 million FSA accounts with over $3.6 billion in contributions. The average FSA contribution was $1,291 in 2022. Eighty-five percent of account holders took a distribution that year. Among those who did, the average distribution was $1,323.
Orman believes an FSA can be a smart financial move, but only if you take full advantage. Here are her tips.
1. Take advantage of the tax savings. The money you put into your FSA isn’t taxed. For example, Orman explained that if you contribute $1,000 this year, then your taxable income for the year will be $1,000 lower. However, you can contribute up to $3,200 in 2024, according to the IRS.
2. Check your plan to see what’s covered. Your plan should have a list of qualified expenses. Not everything will qualify.
3. Use those tax-free dollars to reimburse yourself for qualified expenses. Qualified expenses typically include a range of healthcare products and services, including dental care and over-the-counter medications, that medical insurance doesn’t cover.
4. Use it, or lose it. A majority of FSAs are “use it, or lose it,” which means any money you don’t use before the end of the year will be lost. Orman recommends checking with your employer on its forfeiture rules, as some will allow users to roll over some of the unused funds into the next calendar year.
5. Don’t put too much money in your dependent care FSA. Be careful not to contribute too much of your care payments this year, as it may affect your ability to claim the federal child and dependent care tax credit next year. If you’ve already contributed a significant amount, check to see if you can carry those funds into early next year or prepay some of next year’s costs.
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