Are Flex Spending Accounts Right For You?

Posted by Becky Gulden

CHARLOTTE, NC (WBTV) -  It's day 5 of our series 20 Days, 20 Ways to Survive the Economy and today we're talking about health insurance and those flexible spending accounts.

Health FSA's give you a chance to set some of your paycheck aside  before taxes.

This money is put in a special account and used to pay for health care expenses that aren't covered by your job's insurance plan.

Medical bills can add up very quickly and they are truly a key reason some folks fall behind on their other bills and get into debt.

Especially these days when many employer insurance plans are covering less and less.

So how do you bridge the gap? One idea is to try and forecast some of those extra medical expenses and set money aside throughout the year in what's called a Health flexible spending account.

The State Director of the AARP explains this is a good way to kind of pace your medical expenses.

"Your employer's insurance plan will cover an awful lot of the expenses but those that are not covered through your insurance can be covered through your flexible spending account," said Bob Jackson.

Prescription Drug Co-pays, Over-the-Counter Medications, Vision Care, Some Dental Care, and Hearing Care.

What the accounts don't cover:

Health Clubs/Spas, Cosmetic Surgery, or procedures like Hair Transplants, and Teeth-Whitening

But these accounts can still be a good deal for some who want to reduce taxable income.

Say you make $45,000 a year.

After Taking out $2,000 for an FSA you'll only pay taxes on 43-thousand so you save a few hundred there.

You also in essence get more for your money with 2,000 in pre-tax dollars money that taxes are taken out of.

When it's all said and done in this scenario you can save roughly 450-dollars a year with a flexible spending account.

Now 2-thousand dollars is just a random number... but how do you figure out how much to have taken out of your check.

"You look at your past history of medical expenses... and then kind of say well I haven't been to the eye doctor in a while or I haven't bee to the dentist in a while," said Jackson.

Then you can call ahead and find out how much these kinds of visits cost.

The visit and prescriptions, minus whatever your insurance covers can give you a good idea how much extra money you'll need to set aside for the year.

Here are some drawbacks...

In most cases if you don't use the money you've set aside for the year you lose it.

That's because you can't change your distribution during the year unless you've had a change of life experience... like divorce or birth of a child.

And here's a big drawback to consider. Every year you have a flexible spending account  that ultimately decreases your total Social Security income so your Social Security Benefits might be reduced upon retirement.