FSA/HSA
Both FSAs and HSAs allow you to pull pre-taxed dollars and spend them on health care, but HSAs also function as a retirement account! Both allow you to pay medical bills with pre-tax dollars, but HSAs have some additional benefits. Both have contribution limits and other things to be aware of. Check with HR to see if your company offers an FSA, or read on to learn about HSAs.
How to do it:
FSAs work by setting money aside to pay medical bills. The money that moves through them isn’t taxed, so you can pay with pre-tax dollars AND get your overall income down, but the rules are rigid. Your contribution is set annually and if you wind up with extra you have to spend it by year-end. If an FSA is your only option, consider flowing a small amount of money through, to cover routine medical bills and a little extra. If it’s December and you haven’t spent it all, see our section below.
HSAs are more flexible, but only available to those with high deductible insurance plans. They offer the same untaxed benefit for medical payments, but they also rollover. Your funds accumulate, so you can store them for a year with higher medical bills, or even withdrawn them penalty-free (but taxed) for non-medical expenses after age 65. If you have access to an HSA, choose that. You can still estimate bills and try to avoid overages, but if you wind up with extra, it’s a buffer for next year!
How to spend an FSA down!
It’s the end of the year and you’re FSA has cash left. SPEND IT! Start by going through your medicine cabinet, identifying expired items and things needing refills or replacement. Stock up. Stock up family if they need OTC products, too. You can check to see what’s eligible here: https://www.fsafeds.gov/support/eligibleexpenses
If you still have a balance, buy OTC first aid products to donate to a shelter or other charity. If it’s a big balance, here are some resources for spending it quickly and consolidating receipts/records:
Things many FSAs (or HSAs) allow you to purchase (check your program for details.)
- Everything on the FSA store is eligible with most programs, or your money back.
- There is a similar HSA store with slightly different rules.
- Or use these handy lists to identify OTC products to buy locally. (Make sure you keep receipts and follow rules for your program!)
- Prescription glasses, sunglasses or contacts, including online. e.g. Warby-Parker
If you want to reduce your annual tax burden, funnel money through HSAs and FSAs. The former don’t expire at year-end and can be used as a retirement investment fund.
