For young families, FSAs can help make tomorrow’s dreams come true
Jared Defore, CFP®, CPA/PFS
10.31.19

Like most parents with two kids under the age of 5, it seems like my wife and I are up against a million challenges every day. Parenting is hard work, but we try to cherish every moment with our little guys while also keeping our eyes on our goals for the future. At the moment, one of our grandest goals is a major remodel of our home. We chose our house purely for its location, knowing that it would need lots (and lots!) of work down the road, and so, from day one, we’ve been planning and saving to create our dream home—one that has a real master bathroom (not one the size of a closet!), a kitchen big enough to cook in, and enough space to raise two growing boys.

Of course, socking away enough savings to make that dream come true is much easier said than done. Even with two incomes, our wallets are often stretched pretty thin. But there is one strategy that is helping us make a solid dent in our savings goal: using our Flexible Spending Accounts (FSAs) to reduce our taxes, fuel our savings, and deliver a major income boost just when we’ll need it to fund a major remodel. Here’s how we’re making it happen:

  • We’re maxing out our dependent care FSA. Let’s face it: childcare is expensive! As a two-income family, we have two kids in daycare, five days a week. We spend about $16,000/year for childcare, and that’s only because we were lucky enough to find a wonderful, low-cost option. The childcare FSA allows a family to save up to $5,000 in pre-tax dollars each year to use for qualified child and dependent care expenses as long as incurring those expenses is a result of allowing both spouses to work and earn income. Because this is money you are pretty much guaranteed to be spending anyway, it’s an easy way to reduce your taxable income and, in some cases, even your tax bracket.


  • We’re saving—not spending—our FSA reimbursements. This one can be tough when money is tight, but we’ve budgeted so that when we receive our FSA reimbursement each year (we apply for it as soon as we reach the $5,000 mark), we immediately stash it away in our remodeling fund. Since our FSA contributions come out of my wife’s paycheck over the course of the year, we hardly notice the difference in our monthly budget. Plus, we know that if we really do need the money immediately, it’s there to cover the gap. (Read more about strategies to help maximize your benefits in last month’s blog post, Get More From Your Employee Benefits This Year!)


  • We’re banking on a $21,000 raise when our youngest enters kindergarten. Because we’re currently spending $16,000 on daycare, plus saving the $5,000 FSA reimbursement each year, that’s a total of $21,000 that we won’t be spending five years from now. And because our budget is built to work without that money, we plan to simply add it to our remodeling fund—or use it to pay off the HELOC (home equity line of credit) we’re likely to need to get our project off the ground as soon as possible.


  • We’re maxing out our healthcare FSA. FSAs are ‘use it or lose it’ accounts, but as parents of young children, we know it will be a pretty remarkable year if we don’t spend the maximum contribution of $2,700 on procedures like ear tubes (for both boys!), ER visits, co-pays, and other medical costs that aren’t covered by insurance. By contributing the maximum amount of these pre-tax dollars, we see an immediate reduction in our tax bill. Plus, even if that lucky, low-cost year ever does come our way, there’s a whole list of items we’re ready to spend the remaining funds on before year-end. At the top of the wish list: my wife wants Lasik surgery as soon as we can manage it, and we’d both love a teeth whitening treatment or two. Other options that may be on your own list include acupuncture and chiropractic visits, contact lenses, prescription eyeglasses and sunglasses, orthodontic and dental procedures not covered by insurance, hearing aids, and even massage therapy (which I’m sure every parent could use from time to time!). To view the full list of covered expenses, visit the FSA Feds website.

Together, simply using the dependent care FSA and the healthcare FSA is saving us about 34% in taxes on the $7,700 we’re contributing each year (including income and FICA taxes). That means that even if we do have to dip into the funds we’re putting away for the remodel, we’re still saving more than $2,600/year in taxes alone in 2019. Plus, because the limit typically rises slightly each year, that number will continue to rise and add to our savings over time.

When the boys do graduate from daycare and we’ve (hopefully) reached our savings goal for the remodel, I have secret plans for another pretty big expense: a family trip to Disneyworld! As the child of a bona fide Disney nut, we made a pilgrimage to Florida every two years when I was growing up, so I’m looking forward to sharing that experience with our boys when they’re old enough for us all to really enjoy it. It’s one more thing to look forward to—and a great reward for the next five years of planning and saving using our FSAs.


A quick note about the all-powerful Health Savings Account (HSA)

If you are lucky enough to have access to an HSA and are earning a high enough income that a high deductible health plan (HDHP) isn’t a threat to your cash flow (even when the kids do get sick), it is by far the best plan out there for tax benefits, portability, and investment options. Read all about them in our blog post, Announcing the King of All Savings Accounts: The HSA.


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Wondering how using FSAs might fit into your Financial Plan? Call me to speak about your own personal situation!

Jared Defore, CFP®, CPA/PFS
Financial Planner

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