How to Make the Most of Your Flexible Spending Account (FSA)

Want to get a big tax break on common everyday expenses? Check out the Flexible Spending Account. 

FSAs can cover medical expenses (Medical FSAs), daycare and other dependent care costs (Dependent Care FSAs), and even commuting expenses, like parking fees and public transportation costs (Transportation FSAs).  

Using your FSA can save you a lot of money on expenses you would need to incur anyway.

As stated earlier, FSAs can come in several varieties and each has its own set of rules and benefits. We are going to examine how to make the most of each of these FSAs. Let’s dive into it!

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What is an FSA?

An FSA is a tax-advantaged account that your employer may offer where your contributions can be used to pay for certain types of expenses through a reimbursement system.  Funds contributed to an FSA are “pre-tax” dollars. 

That means that if you earn $50,000 and contribute $2,000 to your FSA, your gross income would then drop to $48,000, which would potentially lower your final tax bill. Some FSAs come with the bonus of matching contributions by employers, which certainly sweetens the pot.

There are two widely offered types of FSAs: medical FSAs and dependent care FSAs.  A less well-known variant is the transportation FSA (where you can get reimbursed for certain parking costs or public transit costs), often known as a Transportation Spending Account (TSA).  

Here’s a brief discussion on each of them. 

Medical FSA

A medical FSA is an FSA that may be used to pay for “qualified medical expenses” incurred during the year.  Your contributions to a medical FSA are tax-deductible. 

You normally have to affirmatively choose to fund this FSA during open enrollment each year (although as of this writing, the passage of the Consolidated Appropriations Act (CAA) has temporarily relaxed this requirement due to the pandemic).  

Unlike a Health Savings Account, there is normally a “use it or lose it” element to these accounts (in other words, if you overfund these accounts and are not able to use the funds for qualified medical expenses during the applicable period, you lose those funds).  However, the CAA has temporarily relaxed this requirement as well.

This lack of flexibility can be a big drawback (at least in normal times), but there are some very clever ways to make sure you don’t lose out on money you contributed to your medical FSA.  Here is an article that provides some helpful tips.

What is a qualified medical expense?  They include the usual suspects (doctor visits, prescriptions, other customary medical expenses).  

The IRS explains that you may be reimbursed for “Qualified Medical Expenses”, which are those specified in the plan that generally would qualify for the medical and dental expenses deduction. These are described in IRS Pub. 502.  

The maximum contribution to a medical FSA for 2021 is $2,750 per employee, although an employer may offer less than that as its plan maximum.  Employer matches can take the combined yearly contribution to the FSA above that amount.  

If you are married, your spouse may also contribute to a medical FSA if their employer offers it.

I also wrote an article on Health Savings Accounts and have used both at different times in my life.  I really like the long-term investment potential that an HSA offers and its ridiculously good triple tax advantage, so I lean toward that (and this is what I am using right now).  

But if your employer is offering a match for the FSA (or if your employer does not offer an HSA), the medical FSA may be an attractive option to cover medical expenses each year.

Dependent Care FSA

A dependent care FSA is an FSA that may be used to pay for eligible dependent care services.  Similar to the medical FSA, you have to affirmatively choose to fund a dependent care FSA during open enrollment and you are subject to a “use it or lose it” feature for this type of account.  However, as with the medical FSA, the CAA has relaxed these restriction for the near term.

The types of expenses you can get reimbursed for are basically preschool, daycare, and before and after school services, for children under 13, but you should check with your tax advisor if you have questions about this.  

A less well-known feature of this type of FSA is that it can also be used to reimburse elder care expenses or expenses for a disabled spouse or relative assuming they live with you and otherwise meet certain qualifying criteria. 

I used this when my kids were younger and it is a pretty nice option if you are spending money on these types of services anyway. 

The maximum contribution (defined by the IRS) to a medical FSA for 2021 is $5,000 per family.  

Unlike the medical FSA, if you are married, your spouse may not contribute an additional $5,000 to a dependent care FSA if their employer offers it (or vice versa).

Transportation Spending Account (TSA)

A TSA is an account that may be used to pay for eligible transportation-related expenses.  Essentially, you are talking about fees for parking at or near your workplace and mass transit expenses (bus, subway, etc.) for commuting to and from your workplace.  

It does not cover gas, tolls, or parking at or near your home.  

Two nice features of a TSA are that (i) you do not have to wait for open enrollment to start a TSA – you can activate it any time and (ii) there is no “use it or lose it” requirement for a TSA. 

As of 2020, the maximum monthly contribution amount for a TSA was $270.


An FSA’s reimbursement feature for certain qualifying (but often common) expenses using pre-tax dollars translates to a meaningful discount on these expenses that you might have to incur anyway.   

If you have questions about how to maximize other employer benefits, we have a series of articles dedicated to discussing benefits available to employees working in corporate America.