And for our second question of the month comes in from Nathan from Michigan on my Facebook Page:
My wife’s new job has a lot of benefits such as insurance, 401k, and FSA. We were going back and forth debating about FSA contributions. We send our daughter to daycare and the advice we got was to do the FSA. The limit is $5,000 a year.
Is it really worth it? How does it work?
Thanks for connecting, Nathan and great question by the way. I don’t think I chat enough on my podcast about the incredible advantages you can get from your workplace benefits.
Let’s discuss your FSA question and then jump into some other benefits people should consider taking advantage of.
Dependent Care Flexible Spending Account (FSA)
The Dependent Care FSA option at work can save you a lot on taxes and can be a great option for the daycare situation you’re describing.
Like the Flexible Spending Arrangement (or Account), it is essentially a separate account where you can save pre-tax money for use on qualified expenses. One of those qualified expenses in the case of your wife’s workplace is dependent care (also known as pre-school, summer day camps and before and after school care).
Potential Savings of Dependent Care FSA
For easy math, let’s say you do the Dependent Care FSA maximum contribution at $5,000 per year (if married, which you are) and you’re in the 30% tax bracket. You’d save around $1,500 per year in taxes (or $125/mo).
Sounds worth it to me!
I used a Flexible Spending Account (FSA) for my LASIK surgery a few years ago and it was half the amount (around $2,500). I was very happy with around $700 in tax savings.
“Use it or Lose It”
Remember that an FSA is a “use it or lose it” program. That means, whatever dollars you contribute, you must use them all before the year is up or you will lose that money. The average FSA holder loses around $50 to $100 per year so try to plan carefully.
Medical Flexible Spending Account (FSA)
If you like the idea of your flexible spending account for dependent care, check out an FSA for your medical expenses as well. This can cover important costs like:
- Medical Expenses
- Dental Expenses
- Vision Expenses (like LASIK Surgery! I love my new eyes!)
- Hearing Expenses
Realize that you need to fund both the medical FSA and the Dependent Care FSA separately if you are thinking of using them both. Evidently, 1 out of 3 people does not know that separate elections need to be made.
While we’re on the subject of awesome workplace benefits, let’s talk about the 401k for a hot second.
If your wife’s employer matches her 401k contributions, I’d highly recommend she take advantage of it. This is free money we’re talking about here.
For example, let’s say her employer matches 10% of her contributions and she contributes the max of $19,000 this year, she’ll get $1,900 of free money from her employer. I mean ya can’t give up the free money. It’s just so… free!
How to Make the 401k Process Easy
If she’s not sure which funds to pick or she’s concerned with confusing things like fees and diversification, check out blooom. It’s a service that helps make the 401k investing process a lot easier. Even if she doesn’t want to use their paid service, they have a free 401k check that she can use to make sure she’s investing her 401k in the most optimum fashion.
Related Interview: How to Invest in your 401k Easily – with Chris Costello
Health Savings Account (HSA)
Another option outside of the Flexible Spending Account (FSA) that is NOT a “use it or lose it” program is the Health Savings Account (or HSA).
The HSA is a savings account designed specifically for health care expenses. Costs like doctor’s fees, prescription medications, dental treatments and even contact lenses can be covered under an HSA.
Your wife would have to be signed up for a High Deductible Health Plan (HDHP) in order to participate.
I started my HSA with Lively last year and I love their no-fee platform. You can choose to save your contributions into an FDIC insured savings account or invest the money with TD Ameritrade.
Your HSA contributions are tax-deductible and your investments grow tax-free. And you can withdraw your money, tax-free at any time as long as you’re using the funds for qualified medical expenses.
Related Interview: The Triple Tax Advantages of the HSA – with Shobin Uralil
Other Workplace Perks
There are dozens of other workplace benefits that your wife should look into. Here’s a quick list (some may be more obvious than others):
- Health Insurance
- Dental Insurance
- Vision Coverage
- Short-Term Disability
- Long-Term Disability
- Life Insurance
- Parental Leave
- Paid Time Off
- Paid Holidays
- Employee Profit Sharing
- Employee Discounts (Cell phone, vehicle plans, etc)
- Reimbursed Expenses
There are so many benefits, but we need to take advantage of them in order for them to really benefit us!
I hope this review of the Dependent Care FSA and my subsequent tangent on other workplace benefits was helpful Nathan. I hope your wife enjoys her new job and you two take full advantage of the benefits she has offered to her. A great place to start is with a conversation with her HR representative. That’s why they have their job!
We just had a baby and will be enrolling in daycare starting February. We will definitely rack up $5,000 next year so looking forward to signing up during open enrollment.
Definitely makes sense! That’s a lot of tax savings.
We use a flexible spending account for daycare (preschool) and it’s great. So nice to get the tax break and the check at the end of the year is always nice. Rumor has it my company may also be offer a HSA next year which is really intriguing. Thanks for the great insight as always!
Hey whenever you can reduce your tax bill … you’re winning!