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FSA, HSA, 401(k) – Oh my!

By Kemberley Washington · Bankrate.com
Friday, November 16, 2012
Posted: 3 pm ET

For many employees, it is open enrollment season again. This is the opportunity to review your company's employee benefits and determine what works best for you in the coming year.

Some estimates have found that benefits account for approximately 25 percent to 40 percent of an employee's compensation package. So, take time to thoroughly review your options. It is one of the most important decisions you will make this year.

Tackling health care costs

Health care costs continue to rise, so choose health care benefits that keep your expenses under control. A health spending account, or HSA, is one way to defray the rising costs of health care. These accounts allow you to sock away money tax-free to be used later to pay for qualified medical expenses.

In order to qualify for an HSA, you must enroll in a high-deductible health plan, or HDHP. HDHPs usually have higher deductibles than other typical health plans, but you typically pay little or no deductible for preventive care benefits.

The federal government sets contribution limits to your HSA. In 2013, singles can make contributions of up to $3,250, while families can make contributions of up to $6,450.

The amount you contribute to your HSA can be deducted on your tax return. Also, any funds you do not spend in your account roll over from year to year until you spend them.

If an HSA is not an option, consider opening a flexible spending account, or FSA. These accounts allow you to use pre-tax dollars to pay for qualified medical and dependent care expenses.

However, unlike HSAs, FSAs have a "use it or lose it" requirement. Therefore, any amounts you do not use by the end of the year will be forfeited.

In 2013, employees can elect to contribute $2,500 toward health FSAs and $5,000 for dependent care FSAs. One of the advantages of FSAs is the amount elected during open enrollment this year would be available on Jan. 1 of the following year.

For example, if you elect to contribute $1,200, you can use the entire amount at the beginning of the year, even though you have yet to contribute the full $1,200 into the FSA account.

Saving for your future

Whether your company offers a defined-contribution or defined-benefit plan, one thing is certain -- you should take advantage of whatever is offered.

Because of the costs associated with defined-benefit plans -- the traditional "pensions" that workers received in past generations -- they are becoming a thing of the past.

Many employers now offer defined-contribution plans, such as 401(k) plans, which provide employees an option to make tax-free contributions. In many cases, an employer will match a portion of these contributions.

Since an employee's contributions are tax-free, anyone who participates can save toward retirement and also reduce his or her tax bill at tax time. At the very least, make certain you contribute up to the employer's matching amount. That will help you make the most of your retirement savings.

Remember: your choice, your future!

Follow me on Twitter @Kemwashcpa.

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