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The quick answer? You could end up losing a lot of money.
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Healthcare can be a huge expense — and one that catches many people off-guard. In fact, a lot of people end up with credit card debt due to medical bills they find themselves unable to pay off at once.
Now, it’s important to have money set aside for medical bills because you never know when you might end up getting stuck with them. And in that regard, you have a few options. You could simply put money into a regular savings account, or you could open a flexible spending account, or FSA, through your employer.
The upside of putting money into an FSA is that your contribution to that account is tax-free. So if you put $1,500 into your FSA, that’s $1,500 of income the IRS won’t tax you on.
But there’s a downside to funding an FSA, and it’s that you have to commit to your annual contribution at once, and you only have a limited window of time to spend your money. And if you don’t manage to use up your FSA balance by the time your plan year comes to an end, you risk forfeiting money.
Don’t lose your money
The amount of time you have to use up your FSA will vary based on the rules of your plan. In general, you’ll get access to your FSA funds at the start of the year, and you’ll have until the end of the calendar year to use that money up.
Some plans, however, are a bit more flexible beyond that point. If your FSA comes with a carryover option, you’ll get a little extra time to use up your money — usually until March 15. Or, you might have the option to roll a small portion of your FSA into the upcoming year’s balance.
But in general, if you don’t use up your FSA by the deadline imposed by your plan, you lose your money. It’s that simple. And that’s why you need to be really careful about funding an FSA in the first place.
How much should you contribute to an FSA?
A good way to determine how much money to put into an FSA is to look at your healthcare spending from the previous year. If you spent $2,000 on things like copays and medications in 2022, and you’ve just gotten a new job and are signing up for an FSA for 2023, then you may want to go with a similar number.
That said, just because you spent a certain amount one year doesn’t guarantee you’ll spend the same amount this year. And similarly, you might spend more this year than last.
Let’s say that last year, your spending came to $2,000, but this year, your child will be starting with braces. That might easily result in an extra $1,000 to $2,000 of spending, so you may want to contribute the maximum to your 2023 FSA, which is $3,050.
But if you’re not sure what your medical bills will look like, err on the side of contributing less to your FSA. You’re better off having to cover a few hundred dollars’ worth of medical expenses without an FSA than losing a few hundred dollars due to overfunding an FSA.
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