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Opening an FSA could save you money on taxes in the new year. Read on to learn more.
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Healthcare is an expense you might have to deal with at any time. Your child could fall and break an arm. Your spouse could wind up in the ER with a kidney stone. Or, you might just get hit hard by cold and flu season and wind up at the doctor a lot.
It’s a wise idea to pad your savings account balance so you have money available to pay for medical bills as they arise. But when you put money into the bank for that purpose, you don’t get a tax break in the process. With a flexible spending account (FSA), you do. So it could pay to open one of these accounts for 2024.
How FSAs work
With an FSA, you set aside money in a pre-tax manner for medical spending, up to a certain annual limit. In 2024, that limit will be $3,200, up from $3,050 in 2023.
The more money you put into your FSA up to the allowable limit, the more income you can shield from the IRS. But you’ll need to be careful not to overfund your account, because if you don’t manage to use up your plan balance by the end of the year on qualifying expenses, you’ll risk forfeiting your remaining balance.
HSAs, or health savings accounts, work differently. With an HSA, your funds never expire, and you can invest the money you don’t need right away to grow your balance.
But HSAs also require you to be enrolled in a high-deductible health insurance plan, and not every plan meets that criteria. FSAs are more flexible in that you don’t need to participate in a compatible health plan to enroll. But you do need to be mindful of your healthcare spending to make sure you’re putting the right amount of money into your account.
Should you open an FSA for 2024?
Since FSAs offer a tax break on the money that goes in, it pays to fund an FSA for 2024 to some degree. And you’ll generally have to commit to a contribution amount before the end of the year.
To figure out how much to contribute, first look at your healthcare spending since the start of 2023. Check your bank and credit card statements to add up your total. You can use that as a baseline, assuming your expenses were pretty ordinary. So if, for example, between specialist appointments, medications, and visits to the pediatrician, you wound up spending $1,200 on medical care this year, that’s probably the minimum amount you should look to contribute in 2024.
From there, think about upcoming expenses you might incur. Let’s say your oldest child is likely to get braces in 2024. That’s an FSA-eligible expense, and it could cost thousands of dollars (though your orthodontist should be able to give you a more precise number). So in that case, maxing out at $3,200 may not be unreasonable if you’re already spending $1,200 a year on medical costs without orthodontist bills.
On the other hand, you might expect your healthcare expenses to drop in 2024. Maybe some of your biggest bills this year were for physical therapy following an injury, but you’re scheduled to finish that up in December. In that case, you’d want to subtract that cost.
All told, FSAs can be a useful savings tool for medical purposes. Just take the time to run the numbers carefully so you don’t end up overfunding your account and running the risk of forfeiting some of your money.
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