Many families are experiencing dramatic changes to their financial situation due to COVID-19. Even if you feel secure in your job and your financial life right now, your life may still be drastically different than it was two months ago. As schools have been shut down, and child care facilities debate whether or not to reopen for the summer months, many parents are planning to work flexible schedules from home for the foreseeable future to watch their kids. However, there’s one problem with this:
For families who contribute to a Dependent Care Flexible Spending Account, the funds are often sitting unused.
Flexible Spending Accounts (FSAs) are a use-it-or-lose-it savings vehicle. Each year you contribute a select amount of money to your account (with a maximum limit of $2,750/year for individuals) pre-tax, and use it throughout the year on qualifying expenses. You may have a Dependent Care FSA or a Health Care FSA.
So, if you’re in a position where you’re not using your FSA funds on child care, or other medical expenses (like elective procedures that have been delayed), what should you do?
Your first step is to check your FSA’s flexibility due to COVID-19. In some cases, depending on your employer, your FSA may be implementing new rules that allow you to either:
However, even if your provider isn’t offering flexibility given the current pandemic, there are several things to keep in mind. First and foremost, it’s important to remember that savings doesn’t only come from money coming in, but also from money not going out.
You are able to use the funds in your FSA through March 15th of the following year without forfeiting the contributions. Even if you can’t use them as you’d originally planned, that doesn’t necessarily mean they’ll be wasted. Sitting on the funds in your account, even if you stop contributing this year, could provide you with the budget flexibility you need to go back to work later this fall, or even in the early part of next year.
Another financially savvy move you can make right now is to compare and contrast your other savings options. A Health Savings Account (HSA), for example, provides many of the same benefits as a Health Care FSA. However, the funds you contribute to your HSA rollover year to year. In fact, some people choose to contribute to their HSA each year in order to build a nest egg for future medical expenses in retirement - while receiving tax benefits now through their contributions.
Another option may be funneling the money you were putting toward your FSA toward other savings vehicles. An interest-bearing savings account, for example, may help you build a small cushion to help cover child care and medical expenses as life starts to return to normal in the coming months - even if those funds aren’t coming from your FSA. You might also look at putting the extra money toward your retirement plan investments if applicable to increase the value of your portfolio and take advantage of dollar cost averaging.
If you have an FSA, and have questions about how to leverage your account or re-allocate contributions, please contact us today. We’re happy to help answer your questions, and to guide you through this trying time.
Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.