Flexible spending accounts can be a very useful financial tool for some people. In fact, there are two main benefits of FSAs. However, much like any financial product, they are not right for everyone in every situation. If you have a healthcare plan that is NOT a high deductible healthcare plan and you have a regular amount of medical expenses each year, an FSA might be just what you have been looking for. (Click here to learn the ins and outs of how an FSA works.)
But for now, let’s go over the two main benefits of having a flexible spending account.
(1) Benefits of FSAs: Saving Money For Medical Expenses
The first, and probably most obvious, benefit of an FSA is that you can more easily save money for medical expenses that you know you will have in the year. This is for two reasons:
- The money will be taken directly out of your paycheck, which makes you more likely to actually save the money.
- You won’t pay taxes on the money that goes into your HSA which makes your money stretch further.
When you have your savings taken directly out of your paycheck you have a MUCH higher chance of reaching your savings goals as opposed to taking the money home into your bank account and then saving it manually. An FSA does that. The money comes directly out of your paycheck so that you don’t have the opportunity to spend it on something other than a medical expense.
And secondly, probably the greatest benefit of an FSA is that the money that goes into your FSA is not taxed (so long as it is used for medical expenses). That means that you can make your money stretch further.
For example, if you were to take the money home and have it directly deposited into your bank account and then save the money for medical expenses, that money would have ALREADY been taxed.
But when you put the money into an FSA, it is never taxed (so long as it is used for medical expenses). So basically, for most people, it is like saving 20-25% EXTRA.
(2) Benefits of FSAs: Lowering Your Taxable Income
The second of the benefits of FSAs is that they lower your taxable income.
FSAs are a great way to lower the amount that you pay in taxes. This is because the money that goes into the FSA is never taxed as long as it is used for medical purposes, thus lowering your taxable income.
For example, if Walter makes $100,000 per year and does not contribute to an FSA he will have to pay taxes on the entire $100,000 that he earns.
But if Jesse also makes $100,000 per year and maxes his FSA out by contributing $2,850 to it. That would mean that he would only pay taxes on $97,150. Thus, all other things being equal, he would pay less taxes than Walter.
Final Thoughts
FSAs can be a very useful insurance and financial tool. They help you more efficiently save for your medical bills as well as lower your taxable income. Just make sure that you USE THE MONEY during the year. If you don’t use it you lose it. That’s the catch.
If you want more information about other insurance topics click here. 🙂
I am here to help you sift through the confusing world that is personal finance.
But just remember, you can do this!
You can achieve your goals and dreams!
I’ll do my best to give you the tools and knowledge to do so. 🙂
Until next time!
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