Make the Most of Your Flex Account in 2012

Here's how to take advantage of an FSA before the amount you can contribute to one is lowered in 2013.

Will the maximum amount that I can contribute to my employer’s medical flexible spending account shrink next year? I recall hearing that the contribution limits will change.

Actually, the rules won’t change until 2013, when the maximum amount employees can stash in a medical FSA will be capped at $2,500 per year. Currently the maximum limit varies by plan, but many employers allow employees to set aside $4,000 or more in these pretax accounts for medical expenses. You can sign up for your 2012 contributions during open-enrollment season this fall.

In light of the impending change, however, you can make the most of your FSA in 2012. If you’ve been thinking of having an elective medical procedure done that’s not fully covered by insurance -- such as laser eye surgery for you or orthodontia for your kids -- you might want to schedule it before the FSA limit changes, so you’ll have access to more tax-free money.

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And, if you plan carefully, you may have an even bigger stash of tax-free money to use for out-of-pocket medical expenses during the first 2½ months of 2012 or 2013. If your employer extends the deadline for using FSA funds to March 15 of the following year, rather than December 31, you can combine any funds remaining from the previous year with the entire amount you earmark for the current year -- even though the full amount has not yet been deducted from your paycheck. If, for example, you have $1,000 left over from 2011 and you sign up to contribute $4,000 to your FSA for 2012, you may be able to use $5,000 in tax-free money to pay for out-of-pocket medical expenses from January 1 to March 15, 2012.

For more information about FSAs and their tax benefits, see The New Rules of Flexible-Spending Accounts and our How Much Should I Put in My Flexible-Spending Account? calculator.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.