Flexible Spending Account = Free Daycare

Now with baby number 3, my wife and I are finally starting to learn some important lessons. Our latest discovery is the company sponsored "flexible spending" account (or FSA). This account allows us to set aside money pre-tax and use it for dependent care. In years passed, we had a hard time with the clause that states "if you don't use it (by date), you will lose it!". There is a whole laundry list of what-ifs that stopped us from setting this up:

• "what if we commit too much"
• "what if we lose our receipts"
• "what if you decide to stay home and we don't need the money.."
• "what if your parents move closer and watch the baby!?

With a new baby in the house and my wife planning on returning to work around January, I took the plunge and signed up for my employer's FSA. I started off only committing about $300 / month to the account. I figured with infant care was about $250/week, this would be quickly spent each pay check. This was with the consideration, that any moneys in the account, not spent before end of fiscal year (7/1/2014) would be forfeited. After consulting my wife, we both agreed that we'd have no issues spending the money each month, therefore we decided to max the deposit out ($5000/year or ~ $416/month). 

Example Flex account, grossly underestimating the tax rate. 

$416 a month, SOUNDS like a lot of money out of my paycheck, but you have to remember that keyword, 401k, by pulling the money out of gross paycheck (i.e. before taxes), I am lowering my taxable income. Lower taxable income = less taken out for taxes; less out in taxes = more back in paycheck. Overall, my January paycheck (first month FSA money was withdrawn), my check was $100 less than December. In essence, we now have $300 of free daycare each month.
"pre-tax". Like investing money in a