Fall for Free Money, Part Two

Imagine for a moment that you had a magical account that allowed you to bypass paying taxes on money you knew you had to spend on some of life's least fulfilling expenses, like an emergency root canal or that expensive but essential blood pressure medication.

It's not fantasy for some workers whose companies offer a benefit called a flexible savings account. And if your company offers the benefit, this may be your chance to sign up. Fall marks the open enrollment season for most employers, the time when they let employees add, revise, or drop their benefits for the coming year.

Flexible spending accounts work like this: You, as an employee, ask that a portion of your salary be set aside from each paycheck to pay for a certain amount of health and child care expenses. The money gets put aside in an account before taxes. When you spend money on qualified health or child care expenses, you're reimbursed from the account. Essentially, you're paying those costs with untaxed dollars and increasing the purchasing power of your paycheck.

Here's the rub: You have to estimate your annual costs for health and child care expenses at the beginning of the year. If you don't use all the money before the end of the year, it becomes the property of the employer, commonly called the "use it or lose it" rule. (You knew this sounded a little too good to be true, right?)

That quirk makes the benefit kind of tricky, but still worth looking at.

It's a little easier for people who want to use a flexible savings account for child care expenses. Anyone who has children in day care or a regularly babysitter probably knows their annual expenses and can pretty easily estimate them for the coming year.

It gets more complicated with health care expenses, because no one without a working crystal ball can anticipate the broken leg suffered while trying to clean the leaves out of the gutter. It can be a little difficult to guess how much you'll spend in the coming year on medical, dental, and vision costs.

One way is to tally up your health care spending for the current year. That can give you a good place to start, and maybe even end. It may pay to be a little conservative with this estimate. You don't want to leave a lot of unused money in the account.

Another way to begin thinking about health care costs is to look at the list of allowed expenses and start estimating your annual cost for each. The list can be pretty broad, and you probably have one in that pile of information that Human Resources handed out. If not, many companies rely on a list produced by the IRS.

Before you declare yourself young and invincible and ignore this whole idea, consider the range of things that count as qualified medical expenses. The IRS allows reimbursement for everyday expenses like contact lenses and cleaning solution, aspirin, and bandages. If you're planning laser eye surgery, that may be covered.

Reimbursement may also be allowed for everything from insurance co-payments and prescription fees to acupuncture and fertility treatments.

Take a couple of minutes to add your potential medical costs, and now imagine saving taxes on all that money. It can make slogging through all that math worthwhile.

For related Foolishness:

For more tips on how to get the most out of every paycheck, try the Fool's new personal-finance newsletter,GreenLight. It's full of practical advice on how to make more money, keep more money, and make your money work harder for you.

Fool contributor Mary Dalrymple welcomes your feedback. The Motley Fool has a beneficial disclosure policy.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 509882, ~/Articles/ArticleHandler.aspx, 10/23/2016 6:46:40 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes