When an FSA Makes Sense for Your Budget

An FSA works best if you spend $500 or more per year on out-of-pocket medical costs and can predict roughly what that amount will be

A Flexible Spending Account (FSA) saves you money only if two conditions are true: you have predictable medical expenses, and your employer offers one. The tax savings come from setting aside pre-tax dollars — money that never gets taxed as income. If you spend $2,000 a year on copays, deductibles, and may be able to access medical items, an FSA could save you $400 to $600 in federal and state taxes, depending on your tax bracket.

The catch is the "use it or lose it" rule. Money you don't spend by the end of the plan year (or the grace period, if your employer offers one) goes back to your employer. That makes an FSA risky if your medical needs are unpredictable. If you set aside $2,500 and only spend $1,800, you forfeit $700.

An FSA is not the right choice if you have a high-deductible health plan and are already using a Health Savings Account (HSA). You cannot have both in the same year. It is also not worth it if your employer does not offer one — you cannot open an FSA on your own.

Key Takeaways

• An FSA reduces your taxable income by the amount you set aside, which typically saves 20 to 30 percent of that money in taxes.
• You must spend the money within the plan year or lose it, so only contribute what you are confident you will use.
• may be able to access expenses include copays, deductibles, prescription drugs, dental work, vision care, and over-the-counter items like bandages and pain relievers.
• If you have a high-deductible health plan, an HSA is usually a better choice because the money rolls over year to year.
• Your employer must offer an FSA for you to have one — there is no way to open one independently.

How much to contribute depends on what you actually spend

The IRS sets a maximum contribution limit each year. For 2024, the limit is $3,200 per person. Your employer may set a lower limit. The real question is not what the maximum is, but what you should actually contribute.

Start by tracking your medical spending from the past year: copays at doctor visits, prescription refills, dental cleanings, glasses or contacts, and over-the-counter items your doctor recommends. Add up what you actually paid out of pocket. That number is your baseline.

If that number varies widely year to year — because you sometimes need dental work and sometimes do not — contribute conservatively. If it is stable, you can contribute closer to what you spent last year. Many people contribute $1,200 to $2,000 annually and feel comfortable with that range.

What you can and cannot buy with FSA money

FSA funds cover copays, coinsurance, and deductibles. They cover prescription medications, dental work, vision care, and hearing aids. They also cover many over-the-counter items: pain relievers, allergy medicine, antacids, bandages, crutches, and glucose monitors.

What they do not cover: health insurance premiums, cosmetic procedures, gym memberships, vitamins (unless prescribed by a doctor for a specific condition), and most toiletries. Sunscreen is not covered. Toothpaste is not covered. The IRS list is long and specific, and the rules changed in 2020 to allow more over-the-counter drugs without a prescription.

You receive a debit card linked to your FSA account. When you use it at a pharmacy or doctor's office, the transaction is usually approved automatically. For other purchases, you may need to submit a receipt to prove the expense was may be able to access.

The "use it or lose it" rule and how to work around it

Any money left in your FSA at the end of the plan year is forfeited. This is the biggest reason people hesitate to open one. If you contribute $2,500 and only spend $2,000, you lose $500.

Some employers offer a grace period — usually two and a half months into the next year — during which you can still spend the previous year's money. If your plan year ends December 31, a grace period might let you spend 2024 money through March 15, 2025. Not all employers offer this, so check your plan documents.

A few employers allow a "carryover" of up to $610 (for 2024) into the next year instead of a grace period. Ask your benefits administrator which option your employer uses. If neither is available, be conservative with your contribution.

FSA versus HSA: which one to choose

If you have a high-deductible health plan (usually defined as a deductible of $1,600 or more for individual coverage), you are may be able to access for an HSA instead of an FSA. The two cannot be used in the same year.

An HSA is almost always the better choice if you are may be able to access. The money rolls over year to year with no "use it or lose it" penalty. You can invest the balance and let it grow. After age 65, you can withdraw money for any reason (though non-medical withdrawals are taxed). An FSA is only useful if your employer does not offer an HSA and you have predictable medical spending you want to shelter from taxes.

If you have a standard health plan (lower deductible, higher premiums), you are not may be able to access for an HSA. An FSA is your only tax-advantaged savings option for medical expenses.

How to enroll and when to make changes

You enroll in an FSA during your employer's open enrollment period, usually in the fall for coverage starting January 1. You choose your contribution amount and it is deducted from your paycheck in equal installments throughout the year.

You cannot change your FSA contribution mid-year unless you have a may have access to life event: marriage, divorce, birth of a child, loss of other health coverage, or a significant change in your health care costs. A job change or a change in your employer's plan also qualifies. Without a may have access to event, you are locked into your choice until the next open enrollment.

When you leave a job, your FSA balance is usually forfeited, even if there is money left. Some employers allow you to continue spending from your FSA for a limited time under COBRA, but you must pay the full premium yourself. Check with your benefits administrator before you leave.

Common mistakes that cost money

The biggest mistake is overestimating how much you will spend. People often contribute the maximum and then scramble to spend the money before it disappears. This leads to buying things you do not need just to avoid forfeiture.

Another mistake is forgetting that the FSA debit card does not work everywhere. Some medical suppliers and pharmacies do not accept it, and you will have to pay out of pocket and then submit a receipt for reimbursement. Keep receipts organized so you can file claims quickly.

A third mistake is not reading your plan documents. Some employers have restrictions on what is covered, lower contribution limits than the IRS maximum, or specific rules about how to submit claims. Your benefits administrator can answer questions about your specific plan.

Frequently Asked Questions

Can I use my FSA for my spouse or children?

No. An FSA is tied to your tax return and covers only you. Your spouse can open their own FSA through their employer if one is offered. Children can be covered only if you claim them as dependents and the expense is for their medical care, but the money still comes from your account.

What happens to my FSA if I get laid off?

Your FSA ends when your employment ends. Any unused balance is forfeited. You may be able to continue coverage under COBRA, but you would pay the full premium yourself. Some employers allow a short "run-out" period to spend remaining funds after termination — ask your benefits administrator.

Can I use FSA money for dental or vision care?

Yes. Dental work, cleanings, orthodontia, and vision exams and glasses are all may be able to access. Contact lens solution and over-the-counter reading glasses are also covered. Cosmetic dental work (like teeth whitening) is not.

Do I need receipts for every FSA purchase?

Not always. When you use the FSA debit card at a pharmacy or doctor's office, the transaction is usually approved without a receipt. For other purchases or mail orders, you will need to submit a receipt showing the item and the amount. Keep receipts for at least three years in case of an audit.

What if I have both an FSA and a health insurance plan with a deductible?

You can use FSA money to pay your deductible. The FSA money counts as your own spending toward the deductible, so it helps you reach the threshold faster and start getting insurance coverage for a larger share of costs.