I have been using a Flexible Spending Account for the past couple of years, and I love it. Now, I had a hard time understanding it at first, but once I figured it out, it became a no-brainer. Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) vary a little, but I will talk about their common benefits.
Both types of accounts are set up through your employer. You determine how much money you want to withdraw from your paycheck and deposit into your FSA or HSA. The money deposited into these accounts are pre-tax. This means that the money is withdrawn before the state and federal taxes are applied. The benefit to this is that your taxible income is less (depending on how much you deposit into the account).
To help you understand this, see my example. Imaging that my bi-weekly pay is $1,000. If I withdraw $200.00 from each paycheck to go toward my qualified health and dependent care expenses (discussed later), then my taxable salary is only $800 of that paycheck. The taxes I pay are based on $800, not $1000.
See following posts about what the FSA and HSA qualify towards and when.
