Don’t Overlook This Easy Way to Put More Money in Your Pocket
If you have an employer, you might be offered a health care or dependent care flexible spending account benefit. Flexible spending accounts are one of those benefits that can make your eyes glaze over, because at first glance they don’t seem like a benefit.
But they’re actually great, because when you take advantage of them you get to:
1) Use more of the money from your paycheck for other things
2) Reduce your tax liability
Basically, it can be like getting a little bit of a raise in the end. To show what I mean, I plugged two simplified scenarios into the Yahoo payroll adjustments calculator.
In both scenarios, the person spends about $1000 a year on expenses that would qualify for a flexible spending plan.
The Current scenario is without any pretax deductions. (In other words, without participating.) The What-If scenario is with the benefit. (The person has $42 taken out of each paycheck pre-tax to fund the account.)
“Wait a minute,” you might be thinking. “How do they end up with more money if their take home pay is less?”
Well, don’t forget that they get reimbursed by the plan for their qualifying expenses.
So in the Current scenario, $32,184 in take home pay per year minus $1000 in qualifying expenses equals $31,184 for other things. But in the What-If scenario, the person gets $31,488 in take home pay for other things. (They still spend $1000 on the qualifying expenses, but they get that $1000 right back.)
In other words, the person puts an extra $304 in their pocket.
Obviously things will vary somewhat for each situation, but the gist of it is usually that participation = more money for you.
(Just be careful not to overfund the plan, because it’s a use-it-or-lose it thing. Remember to read up on future flexible spending account changes too when deciding how much to allocate to a plan.)