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medical account - too much vs too little

We have the pre-tax medical dedection signup available each fall. A couple of years back, we projected enough to cover our son's braces, and we scrambled at the end of year to squeeze every dollar out of the account.

This year, we didn't foresee any major expenses, so we cut back.

Well, yup - I needed to have a crown replaced on a tooth. Our dental coverage was 80% with the remaining 20% out of pocket. If we submit the 20%, it pretty much covers the entire years worth of flex spending.

SO - not really thinking this thru yet - is it better to deduct more (not taxed), even if you will not spend it and will loose it at end of year, or deduct less, and have the remaining come out of pocket (taxed) - but not enough for a Sched A deduction.

Reply to
P.Schuman
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[re: FSA "use it or lose it" pre-tax medical savings]

Run the numbers.

Suppose you have $100 in earnings you are thinking about and your marginal tax rate is 30%.

If you put that $100 into the account, but use only $80, you're walking away from $20.

But because your marginal tax rate is 30%, if you hadn't put that $100 into the account, you'd have only taken home $70 to spend. So anything up to that first hundred bucks of medical care only costs you $70.

With the FSA, you "spent" $70 on $80 worth of medical care regardless of the $20 you walked away from - a savings of $10 (in after! tax money).

If you spent only $70 on medical bills, it's a wash. If you spent only $60 on medical bills, you overpaid because you used the FSA.

That was all a very verbose way of saing that any money in the FSA which is above (1 - tax rate) is 'free' money that, yes, you'd hate to walk away from, but doesn't cost you anything if you do so.

Reply to
BreadWithSpam

[...]

Include in the tax rate the 7.65% savings of SS and Medicare tax also.

-Mark Bole

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Reply to
Mark Bole

Also you could switch to an HSA where theres no time limit. My employer just offered the insurance this year, but had to find our own account administrator. A fee years back they were charging large fees, but there are some no-fee accounts now.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Reply to
rick++

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