A flexible spending account (FSA) can be a great way to cover your out-of-pocket medical expenses with pre-tax money—meaning you can save money just by putting funds aside for your medical costs that insurance doesn’t cover. But if you’ve never had one before, you might be confused about how much money to contribute.
If you don’t contribute enough, you’ll burn through your cash fast end up covering the remainder of your costs for the year from post-tax dollars. Contribute too much, and you could lose your remaining balance at the end of the year.
To figure out how much you should contribute to your FSA, consider the expenses you know you’ll face for the upcoming year, advised Myles Ma, health care expert at insurance comparison site Policygenius. Make a list of doctor and therapy visits, prescriptions, dental visit copays, vision appointments, glasses, contact lenses, “and any other health-related stuff you know you’ll need in 2020,” Ma said.
If you didn’t track what you spent in these categories this year, you can think of the very basics you’ll need in the next year. That might mean a routine physical, a doctor visit for a lingering cold, two teeth cleanings, and a new pair of glasses. If your medical needs are more complex, you might add on some of the other expenses for which you can use your FSA funds: pain relievers, suncreen, allergy medication, and contracptives are just a few.
If you want to enter your anticipated costs for medical expenses or dependent care expenses, I like Cigna’s calculator that walks you through those estimates to help you determine a solid amount to contribute.
If your health insurance plan has a deductible, Ma says you should have enough, between savings and your FSA, to cover that amount. But don’t overload your FSA preparing for the worst-case scenario. “Make sure you’re not putting more than you can reasonably spend in your FSA, otherwise you’ll be scrambling to buy hundreds of dollars worth of bandages at the end of the year,” he said. “Unlike with an HSA, FSA funds don’t typically carry over at the end of the calendar year.” Ma said over-contributing without a plan for spending that money on covered expenses is the biggest pitfall of having an FSA.
The cap for contributing to your FSA is $2,750 (or $5,000 for dependent-care expenses), so while you can’t get too wild and crazy with your contributions, that can still be a large amount if you don’t accurately predict your eligible expenses for the year. Keep in mind that some employers, but not all, allow you to roll up to $500 into the next year, or give you a grace period of 2.5 months to spend what’s left.