3 Things You Need to Do Before Contributing to Your 2021 FSA

Have a flexible spending account? Check these items off your list before determining your 2021 contribution.

A flexible spending account, or FSA, can be a particularly valuable employer benefit. An FSA lets you set aside pre-tax dollars to pay for both healthcare and dependent care expenses. The more money you put in, the less income you get taxed on. And the less tax you pay, the more financial flexibility you have to meet other goals, like padding your savings.

The annual contribution limits for FSAs change from year to year, but in 2021, they'll be the same as in 2020:

• $2,750 for healthcare, which includes doctor visit copays, prescriptions, certain over-the-counter medications, eyeglasses, and dental care
• $5,000 for dependent care, which includes daycare centers, summer camp, and after-school programs

The tricky thing about FSAs is that contributions are made on a use-it-or-lose-it basis. Some plans will allow you to carry a limited portion of your balance into the next plan year. But it's best to plan to use up all of your FSA funds within the year. That way you avoid forfeiting a portion of your contributions.

If your employer offers an FSA, chances are you'll need to commit to a 2021 contribution in the coming weeks. You won't be allowed to change that contribution unless you experience a life change next year like a marriage, divorce, or the birth of a child. Before you land on that number, do the following things:

1. Review your 2020 healthcare spending

You never know when a random injury or illness will add to your healthcare expenses. But it still pays to use this past year's spending as an indication of how much you'll pay for healthcare in 2021. If you racked up $2,000 in copays and other costs this year, you may want to contribute a comparable amount for 2021. That's assuming there aren't any specific added expenses on your radar for the coming year.

2. Think about upcoming healthcare expenses

Maybe there's a minor but costly medical procedure you've been putting off due to a lack of funds. Or perhaps you have a child who will likely need braces in 2021. Reviewing your previous healthcare expenses will help you land on the right FSA contribution, but don't forget to account for new costs, too.

3. Assess your childcare needs

Childcare has been a mess in 2020 due to the coronavirus pandemic. As such, you'll really need to plan carefully for 2021 to avoid putting too much or too little into your FSA on the dependent care side.

If you rely on school for childcare, you may want to call and see what plans they have to add classroom hours for 2021. That's assuming your child isn't already in school full-time, which is the case in much of the country. If your child isn't yet school-aged and attends daycare, call your center and see if your current rate will hold true next year. Many daycare centers charge different prices as children age into and out of different programs. Finally, if your child typically attends summer camp, you may want to contact yours and see what their opening plans are for 2021.

One thing to keep in mind is that you may want to err on the side of caution. Despite the potential loss of tax savings, it may make sense to put less money into your dependent care FSA for 2021, not more. Say you normally spend $5,000 for your two children to go to summer camp. At this point, it's hard to say whether camps will be open next year, but if you contribute that $5,000 only to have yours remain closed, you risk losing that entire sum.

Plan carefully

While FSAs offer lots of tax savings, they can be tricky to navigate -- especially at a time like this. Think carefully before putting money into your account for 2021 so you don't wind up regretting your decision afterward.