Wednesday, February 27, 2008

Spring-Clean Your Tax-Advantaged Savings Plans

Tax-advantaged savings plans like Health savings accounts (HSAs), 529 educational savings plans, medical savings accounts, and flexible spending accounts (FSAs) are all great ways to shelter money for particular expenses. Are you making the most of these plans? I just spent five minutes looking at mine and found a way to save $75.

First, find out which plans you’re eligible for.

  • 529 plans, which come in two forms and can be used to “prepay” tuition or to save for future college costs, are open to everyone regardless of employer or employment status.
  • Depending on your employment status and how much you pay for healthcare, you are probably eligible for one of the three types of tax-advantaged healthcare savings accounts: a health savings account (for people with "high-deductible" health insurance), a medical savings account (for the self-employed), or a flexible spending account (for many employed individuals).
  • Flexible spending accounts are offered through your employer. Dependent care (day care and elder care) and healthcare are the most common uses for these accounts, but my employer also offers me an FSA for reimbursement on commuting costs.

Contribute the right amount. If you set up these accounts through your employer, you were probably told about them in your first week of work when you were still figuring out how to use your e-mail and had little time to calculate your average yearly daycare costs. Tax time is a great time to review how much is in these accounts, how much you used last year, and whether you’re contributing too much or not enough. Double-check your contributions. When I signed up for my transportation FSA, I simply divided my monthly transportation costs by two. A few days ago, I realized that since I get paid biweekly (26 times a year) rather than twice monthly (24 times a year), I’m overcontributing by $75.00 a year. I changed my contribution to the quirky-but-accurate $34.61 per paycheck.

Keep your contributions current. Review tax-advantaged savings plans regularly to allow for changes like new prescriptions, changes in copay amounts, rising transportation costs, or that baby-sitter you hired to keep you sane after your father-in-law moved in.

When you’re done with that chore, some frugal inspiration (pro-anorexics have “thinspiration.” Perhaps we can have “frugspiration”? Much healthier and less creepy!):

Stacking Pennies talks about free things she loves.

Donna Freedman at MSN money blogs offers tips for staying frugal over the long haul.

If, like me, you’re under 40 and already antsy for retirement, check out the Young Dreamers forum at Early Retirement Forums. Check out the other boards, too, while you're at it. The people on this board know everything there is to know about early retirement. Many are spreadsheet junkies who are happy to help you find the flaws in your plans and figure out how to correct them.

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