Pay for Child Care? Here's One Benefit to Sign Up for During Open Enrollment

Raising a child is expensive. This holds true whether you're in the infant stage, the elementary school stage, or the teen years.

One benefit of having older kids, though, is that you might at least get to save money by virtue of no longer needing child care. On the other hand, if you work full-time outside the home and have a 2-year-old who's clearly too young to attend school, you may be looking at some pretty hefty child care bills.

The cost of child care can vary depending on where you live. Research from The Ascent found that California is the most expensive state from a child care perspective, and the cost of care for two children is $28,420 per year on average. In South Dakota, which was ranked the most affordable state for child care, the average cost of care for two children is $12,860.

But no matter what your child care costs amount to, it's in your best interest to try to offset them. And signing up for one key workplace benefit could help you do just that.

It could pay to open a dependent care FSA

Many people are familiar with flexible spending accounts (FSAs) in the context of healthcare. But there's a child care version you should know about, called the dependent care FSA. It allows you to contribute funds for qualified services that include daycare centers and summer camp.

And like a health FSA, dependent care FSAs are funded with pre-tax dollars. So any money you contribute to one of these accounts is money the IRS can't tax you on.

Now, the contribution limit for healthcare FSAs tends to change from year to year, and next year, it will rise from $3,050 to $3,200. The limit for dependent care FSAs in 2024 will be the same as it is today, and the same as it's been for years -- $5,000 -- since that limit isn't adjusted for inflation like the healthcare limit.

That $5,000 limit also applies to people who submit their taxes as singles or married filing jointly. If your status is married filing separately, your dependent care FSA limit is $2,500.

Calculate your child care costs carefully

If you pay for full-time child care, then maxing out your dependent care FSA for 2024 might seem like an easy call. But keep in mind that these accounts work on a use-it-or-lose-it basis. So if you put $5,000 into your dependent care FSA but only end up spending $4,500 on child care costs, you'll risk losing your remaining $500.

But unfortunately, given what child care costs today, you may find that you're able to spend a $5,000 balance easily even if you only pay for part-time care. So crunch the numbers and see what contribution makes sense for 2024. You'll generally need to commit now, during your company's open enrollment period where you sign up for benefits.

If you put $5,000 into your dependent care FSA, it's $5,000 of earnings the IRS won't tax you on. That doesn't make up for the exorbitant cost of child care, but it might help soften the blow.