FSA (Flexible Spending Account)

An FSA lets you route part of your salary into a dedicated account before income and payroll taxes are applied, then spend it on qualifying costs. For someone in the 22% bracket, that is roughly a 30% discount on expenses they were going to have anyway once payroll taxes are counted.

The defining constraint is the deadline. FSAs are use-it-or-lose-it: money unspent at the end of the plan year is forfeited to your employer. Plans may offer one of two softeners — a modest carryover into the next year, or a grace period of a few extra months — but never both, and neither is required.

A health FSA has a quirk in your favor. The full annual election is available from day one, even though you fund it gradually through payroll. If you leave mid-year having spent more than you contributed, you generally do not repay the difference.

Dependent care FSAs work differently and are worth separating in your head. They cover childcare and eldercare rather than medical costs, have their own lower limit, and reimburse only what you have actually contributed so far.

The contrast with an HSA is the thing to get right. An FSA is tied to your employer, expires annually, and cannot be invested; an HSA rolls over forever, is portable, and can be invested — but requires a high-deductible health plan, while an FSA does not.