If you’re a business professional looking to save for medical expenses, child care or other qualified expenses, you may want to consider a Flexible Savings Account (FSA). An FSA is an account that allows employees to set aside money from their paycheck to cover certain medical and dependent care expenses. Unlike a traditional savings account, any contributions to an FSA cannot be used for any other purpose. Instead, these funds must be used for qualified expenses by the end of the plan year or forfeited.
How Does a Flexible Savings Account work?
The primary benefit of an FSA is that the contributions made to it are made on a pre-tax basis. That means the money used to fund an FSA does not incur taxes like ordinary income. The money is deducted from your paycheck before taxes are taken out, thus reducing your taxable income. This can be a great way to save for approved expenses and reduce your overall tax burden.
It’s important to note that employers typically set limits on the total amount of money an employee can set aside in an FSA each year, with the most common being a $2,650 limit per employee. Any funds that are unused by the end of the plan year are forfeited, so careful budgeting is essential.
How to Get the Most out of an FSA
To maximize the benefit of an FSA, business professionals should plan ahead for expected expenses during the plan year and adjust their contribution amount accordingly. That way, all of your contributions are used and none are forfeited at the end of the plan year. Some employers also offer “rollover” of funds from one plan year to the next, so check with your company’s Human Resources department to see if that is an option for you.
If you’re looking for a way to save money on medical or child care expenses, a Flexible Savings Account is a great option. Although managing an FSA requires careful planning, the potential to save money on taxes makes it an attractive option for business professionals.