Who Can Use Health Savings Accounts and Flexible Spending Arrangements

There is one catch: You must use the entire amount of the FSA by the end of the benefit period or the funds go back to the plan, which your employer typically uses for other benefits. This "use-it-or-lose-it" feature often scares people away from signing up for FSAs, says Jerry Ripperger, director of consumer health for the Principal Financial Group in Des Moines, Iowa. To determine how much you should set aside in your FSA, go through a typical year's records—not one in which you incurred a lot of unexpected expenses—and tally your health-related costs not covered by insurance. If you’re close to losing money, try to move up an elective procedure that you may have been planning for the following year.

What it can be used for: Money in your FSA account can be used for a broad range of medical expenses, such as acupuncture, braces, eyeglasses, hearing aids, insurance co-pays, medication, and deductibles.

How you save: "The FSA may be the most underutilized tax-advantaged vehicle the government has given us," says Ripperger. Since the money you put in the account is not taxed, there is more of it—100%, rather than the 70% or so after taxes—to spend on health-care needs. And because the money is subtracted from your pay before taxes, your overall taxable income is lowered, reducing the amount of taxes you owe at the end of the year. The savings are significant: Someone in the 25% tax bracket, for instance, will get a discount of about 37% on health-care costs that are paid with the money in their FSA.

Bottom line: If your company offers an FSA, sign up. "[But] don’t get overly aggressive on your calculations," Farlow advises. Try to be realistic and conservative about how much money you will spend each year so you don’t end up losing any money left in the account.