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Making the most of your flexible spending account

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4. Know the rules
Sometimes a little detective work can keep you from wasting FSA funds. Many qualified expenses might not seem obvious, so it may be wise to contact your human resources specialist for a comprehensive list.

"Counseling, mental health services and eye care expenses (are qualified)," Dippel says. "Also, people don't tend to think about dental costs, but that's a big category."

Remember that you can apply for reimbursement of these expenses at any time before the deadline, even if the expense was incurred months earlier.

Knowing other rules can also save you money. For example, if you leave a job sometime during the year, don't assume that you need to say goodbye to the money accrued in your flexible spending account.

"If you leave a company, and you have a balance in your FSA account, you can still send in claims as long as they were incurred prior to the date of termination," Kaufman says.

5. Buy medicines with leftover funds
No matter how carefully you plan, it is possible to have funds remaining in your account as the reimbursement deadline draws near. If you get toward the end of your plan period and still have money left in your health care FSA, consider your over-the-counter requirements.

"Get your medicine cabinet in gear for the next year," says Dippel. "Consider getting cold medicines, ibuprofen, Band-Aids -- it's a good time to stock up on those things anyway."

Many drugs that were formerly prescription-only -- like loratadine (sold under the brand name Claritin) -- are now available as OTC medicines. If you do stock up, be sure to check the expiration dates on your products to make sure they are current.

6. Don't be afraid to 'lose' it
The biggest potential drawback of opening a flexible spending account is the risk that you will have to forfeit funds at the end of the plan year. But this fear can be misguided.

"One of the big hesitations people have about FSAs is they're worried about losing the money in their account if they don't spend it in time," says Dippel. "But even if you don't use it -- say you only spend 80 percent of what's in the account -- you're still coming out ahead because of the tax savings."

Consider this illustration: You anticipate paying for a $100 procedure next year. If you make $100 in gross pay, you'll probably receive around $75 in net pay, after taxes. So, to pay for the $100 procedure with taxable funds, you'd have to earn closer to $125 in gross pay to cover your cost.

On the other hand, let's say you put $115 into an FSA account and pay for the procedure with these tax-free funds. Even if you don't spend the remaining $15 before the end of the plan year and "lose" the money, you still come out ahead because you're spending less than the $125 you'd have to earn in taxable funds to pay for the procedure.

The savings are even greater for more expensive procedures.

It's easy to feel like you're rolling the dice when deciding how much money to put into a flexible spending account. Allocate too little and you don't reap as big of a tax savings as you deserve. Allocate too much and you could lose some of the money. Using these tips can help you make smart decisions about flexible spending accounts while potentially saving you a lot of money on your taxes.

Bankrate.com's corrections policy -- Posted: Oct. 30, 2007
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