Planning Briefs

More Flexibility Allowed In Flex Spending Accounts

Published Monday, March 24, 2014 at: 7:00 AM EDT

Despite the name, "flexible spending accounts" (FSAs) haven't offered enough flexibility to suit some employees. But now the tide may be turning.

With an FSA, you can elect to allocate part of your salary to a special account for health care or dependent care expenses. Your contributions to the spending plan are made on a pre-tax basis and there's no tax on withdrawals to pay for eligible expenses.

Sounds like a good deal, right? However, a "use-it-or-lose it" rule for FSAs often has discouraged participation. Under this rule, you must forfeit any funds remaining in the account at the end of the year.

But the IRS relaxed this rule slightly a few years ago, allowing employers to implement a grace period of 2 ?? months after the close of the tax year. For example, if you incurred medical expenses in February, you still could use the funds remaining in a health care FSA from the prior year.

Now the IRS has gone one step further. It says an employer can allow FSA participants to carry over up to $500 of funds left in the account to the following year. But there's a catch: You can't use both the grace period and the $500 carryover. It's one or the other.

Note that the annual limit on contributions to a health care FSA is $2,500, but you can contribute up to $5,000 annually to a dependent care FSA.

This article was written by a professional financial journalist for Preferred NY Financial Group,LLC and is not intended as legal or investment advice.

An individual retirement account (IRA) allows individuals to direct pretax incom, up to specific annual limits, toward retirements that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Tranditional IRA. Contributions to the Tranditional IRA may be tax-deductible depending on the taxpayer's income, tax-filling status and other factors. Taxed must be paid upon withdrawal of any deducted contributions plus earnings and on the earnings from your non-deducted contributions. Prior to age 59%, distributions may be taken for certain reasons without incurring a 10 percent penalty on earnings. None of the information in this document should be considered tax or legal advice. Please consult with your legal or tax advisor for more information concerning your individual situation.

Contributions to a Roth IRA are not tax deductible and these is no mandatory distribution age. All earnings and principal are tax free if rules and regulations are followed. Eligibility for a Roth account depends on income. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).