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| © Getty Images A doctor standing in front of a sunny window in her office and speaking with her male patient sitting in a chair. |
By Maurie Backman, The Motley Fool
It's that time of the year again. No, we're not just talking about Halloween. Now's when open enrollment has kicked off in most workplaces, which means in the coming weeks you'll need to choose your healthcare benefits for 2022.
One employer benefit you may want to take advantage of is a flexible spending account (FSA). FSAs come in two varieties -- healthcare and dependent care. The former covers things like copays for medical appointments, prescriptions, and certain over-the-counter medical supplies. The latter covers the cost of things like daycare, after-school care, and summer camp.
Healthcare contributions for 2022 max out at $2,750 and dependent care contributions max out at $5,000. FSAs are funded on a pre-tax basis, so the more money you put in up to these limits, the less income the IRS gets to tax you on.
Funding an FSA can benefit you financially, but here are a few FSA mistakes you'll want to do your best to avoid.
1. Not reviewing your healthcare spending to estimate your FSA needs
The tricky thing about FSAs is your money goes in on a use-it-or-lose-it basis. If you put $2,000 into an FSA but only rack up $1,000 in medical expenses, you'll risk forfeiting the remaining $1,000.
That's why it's important to review your expenses from the past few years when making your FSA election for 2022. Look through your bank account and credit card statements and see what you spent on everything from doctor visits to medication.
You also shouldn't just rely on data from 2020 and 2021. Many people spent much of the past 19 months in isolation, and that may have resulted in less healthcare spending, or different spending. It's a good idea to look at your spending from 2019 as well.
2. Forgetting about upcoming eligible FSA medical expenses
Maybe you spent $1,500 on medical costs this year and think you'll allocate the same amount of money to next year's healthcare FSA. But what if your child will need braces next year? Or what if you're due for an expensive medical procedure your insurance will only partially cover? Do your best to anticipate those expenses, because it could pay to boost your FSA contribution for the new year.
3. Not assessing your childcare needs
Many people were able to work remotely for much of 2020 and 2021. But now, more people are being called back to the office, which means your childcare needs could increase. If that's the case, it may be appropriate to allocate more money in the dependent care portion of your FSA to cover those costs.
4. Not signing up at all
Some FSAs give you a debit card so you can pay for your healthcare and dependent care expenses as you go, thereby avoiding the need to submit claims. Sometimes though, you'll need to pay for your costs up front and then submit claims for reimbursement. The latter can be time-consuming, and it'll mean having to keep track of your receipts and documentation. But remember, there are tax savings to enjoy from participating in an FSA, and that savings may be more than worth the hassle.
Read more: How to survive the coming retirement crisis
Once you allocate a certain amount of money to your FSA, you can't change it, so it's important to make the right decisions from the start. If you manage to avoid these mistakes, you'll set yourself up to get the most benefit from your FSA in the new year.
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