Basics

Asked and Answered: How much should I contribute to my FSA?

If you just opened (or are about to open) an FSA during open enrollment, you know it's smart a money move, but you have no idea how much you should allocate. You've done your research and know that your employer offers flexible savings accounts, but you're not sure how to find your FSA allocation number.

In fact, you may not even be sure how much you spent on health expenses last year. Or maybe you had the perfect allocation total last year, but life has changed since then. (That tends to happen a lot in my household.)

If this sounds like you, don't panic. You've already taken the first step and decided that you want to open an FSA. The next step is simple: use an FSA calculator.

(As always, keep in mind that we're not financial professionals, nor is this website aiming to provide financial or tax advice. Be sure to speak with a qualified financial adviser before making determinations about your accounts.)

Calculate your FSA number

The best way to determine how much money you should allocate to your FSA is with an FSA calculator. The calculator asks you to input a variety of information, including your income and estimated expenses for each category. After you input your numbers, you're shown exactly how much you should allocate based on your estimates. You also learn how much you could save on taxes.

For example, if you earn $45,000 per year and allocate $2,500 to your FSA for health care expenses, your estimated tax savings from your FSA is $812.

But here's the deal—in order to use the calculator to accurately estimate your health care expenses, you need to have an idea of what those expenses will be. If you just went through a big life change or are a first-time FSA user, that might seem difficult. Luckily, it's not as hard as it seems.

Here are some expenses you might want to keep in mind.

If you're a new parent…

Congratulations! If you're a new parent, your health care expenses will likely increase thanks to an uptick in doctors appointments and health-related items for your baby. In general, new parents should expect to increase their FSA allocation.

(Plus, this might be a great time to open a dependent care FSA to pay for eligible child care expenses.)

If you're recently divorced…

If you're recently divorced and don't have children, your health care expenses might decrease because you're only responsible for your own health care expenses now. The best way to find your allocation number is to review last year's expenses and calculate your new number based only on your own expenses.

However, if you're recently divorced and have children, your FSA allocation number might stay the same or even increase, depending on your custody arrangement. Also, if you're planning on paying for daycare for your children, it might be a good idea to open a Dependent Care FSA.

If you have a recent health diagnosis…

If you've recently received a health diagnosis and are unsure what your health care expenses will look like now, it might be a good idea to increase your FSA contributions. Even if you allocate an extra $50 per month, it might make a big financial difference throughout the year. Plus, you might spend some of the money on FSA-eligible products related to your diagnosis.

If you're a first-time FSA user....

Welcome to the club! If you're a first time FSA user, it might be challenging to find the perfect allocation number, but that's okay. Even if you only put $100 per month towards you FSA, you could save hundreds of dollars in taxes.

Do your best to calculate your contribution number based on last year's health expenses, but don't worry if it's a little low or high. Next year, you'll be able to calculate more accurately.

Bottom line

It's okay if you don't find your "ideal" FSA contribution number. The most important thing is that you're starting to save money in your FSA and prepare for your health care expenses. Your bank account will thank you.

Smart, eligible buys...

Battle Creek Pain Relief Bed Heating Pad, 18" x 36"

The perfect solution for people with poor circulation or cold feet.

$69.99

Caring Mill Assorted Variety Bandages, 280 ea

This is a great bandage set that offers a variety of sizes to cover the most common medical situations.

$10.99


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From FSA basics to the most specific account details, in our weekly Asked and Answered column, our team gets to the bottom of your most-pressing flex spending questions. It appears every Wednesday, exclusively on the FSAstore.com Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook, Instagram and Twitter.

Accounts

Flex-Ed: I owe money on my tax return... an FSA could have helped

My jaw dropped when I received the email from my accountant. I stared at my tax bill in disbelief for a few minutes, but reality quickly set in: I owe the IRS over $3,000. As it turns out, I'm one of the taxpayers who had insufficient tax withholding throughout 2018 and now owes money due to the Tax Cuts and Job Act that became official last year.

As it turns out, I'm one of the estimated 30 million Americans who owe money on their taxes this year. I'm lucky enough to have the funds to pay my bill in full, but it's still painful to part with the money. In many ways, I should have known better. Because here's the truth: I did not have an FSA in 2018.

It's embarrassing to admit because I thought I had already learned my lesson about tax-free health accounts. But once again, life happened. So as a result, I missed the boat on opening an FSA in 2018, and now I'm paying the price (literally).

It's too late to change what happened, but it's not too late to learn from it. Here's how much money I might have been able to save on taxes if I had opened an FSA.

My health care costs

After tallying my health care expenses — doctor's appointments, prescription medication, dental treatment and FSA-eligible supplies — I spent nearly $2,500 on health care in 2018. Nearly half of that came from unexpected dental treatment, which was FSA-eligible.

But the truth is that I thought I spent much less on health-related expenses last year. In fact, when I estimated how much I would spend on health care in 2018, I thought that I would spend $700. In other words, I thought I would spend $800 less than I actually did. Yikes.

My optimistic estimate about my health care expenses is actually part of human nature and our overly optimistic predictions for the future. It's often known as the optimistic update bias. This is important to understand because it can help us plan more realistically for the future.

The FSA calculator

I was shocked when I finally sat down to look at how much money I could have saved with an FSA last year. According to the FSA Store calculator, I could have saved $1,816 on taxes. That doesn't mean that I would necessarily owe less in taxes (although I probably would because it would have lowered my overall taxable income) but I would have paid less in taxes upfront.

The real kicker is that my 2018 net pay would have been nearly $2,000 higher if I had put $2,500 into my FSA. Plus, according to the calculator, I could have "broken even"—not saved or spent any extra money—if I had spent at least $684 from my FSA. In other words, even if I had set aside $2,500, but only spent the $700 I thought I would need for 2018, I wouldn't have gained or lost anything. (Although I probably could have used my extra funds to buy FSA-eligible health supplies…)

How to avoid these mistakes

The truth about my health-related finances is that I fell into the trap of short-term planning. I had a lot of financial goals for 2018 — investing, travelling, preparing for graduate school — and I wanted to save as much money as possible, and in my effort to cut costs, I actually ended up spending more money in the long-run.

It's great to be optimistic about the future, but if there's one thing I learned this year, it's that a healthy dose of skepticism (and number crunching) is better for my budget and my sanity.

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New to FSAs? Need a refresher course in all things flex spending? Our weekly Flex-Ed column gives you a weekly dose of FSA Living 101, offering tips for making the most of your tax-free funds. Look for it every Thursday, exclusively on the FSAstore.com Learning Center.

FSAstore.com Featured In the New York Times

Rule Changes Increase Flexibility in Pretax Health Care Accounts

By Ann Carrns, New York Times

"AS open enrollment season approaches for those with workplace health benefits, employees may want to take a fresh look at health care flexible spending accounts, if their employers offer them, because the rules for the accounts have changed.

Flexible spending accounts, or F.S.A.s, can help save money by letting people use pretax dollars to pay for costs a health plan doesn’t cover. That might include dental care, fertility treatments or equipment like blood pressure monitors. About 14 million families participate in health F.S.A.s, the federal government estimates."

The FSAstore.com Calculator was featured in the article.

Read the full article via The New York Times