A flexible spending account, or FSA, is a tax-advantaged account for health care expenses. Workers can shelter some tax-free income in an FSA and use it to pay for qualified medical expenses.
Not only are FSA funds exempt from ordinary income tax, but they’re also exempt from payroll tax. That makes an FSA a very attractive option for any worker.
However, much of the money within your FSA is “use it or lose it,” meaning that you forfeit any cash that you don’t spend by Dec. 31.
In other words, if you have an FSA this is a good time to check the balance and schedule your annual medical checkup, dental cleaning and eye exam before the calendar flips.
It is worth noting that under a 2013 IRS ruling, companies now have the option to allow you to roll over up to $500 in FSA funds for next year’s use. Check with your human resources department to see if you have this option.
If you don’t yet have an IRA or 401(k) and would like to start one, try to open your retirement account by the end of the year.
That will allow you to reduce your taxable income for the outgoing year.
For example, let’s say you became self-employed near the end of this year and now want to open a solo 401(k). Time is running short, so make sure to establish your account with a brokerage during this calendar year.
With an IRA, you have until April 15 of the new year to add funds to the account which will apply to the old year, for tax purposes.