A flexible spending account has its advantages

Personal Finance editor HELEN HUNTLEY E-mail: Click here Archive

By HELEN HUNTLEY

© St. Petersburg Times, published November 12, 2000

Q. The company I work for is promoting a flexible spending account for health care expenses, but it doesn't seem like a great deal to me. Our health insurance plan covers most of my bills and I understand any money left in the account would be forfeited. Am I missing something here?

A. Yes!

The big benefit of using a flexible spending account is that you pay medical expenses with pretax dollars. You also escape Social Security and Medicare taxes on the money. It is true that you forfeit unused dollars at the end of the year, but with careful planning, you can keep the amount to a minimum. If you are in the 28 percent tax bracket, you could forfeit a third of the money and still come out ahead, so you've got a pretty big margin for error.

You may have more eligible expenses than you realize. In addition to co-payments for doctor's visits and prescription drugs, you can use your spending account for many expenses not covered by your health plan. Most of the money I run through my plan ends up paying for dental care. You also can use the account to pay for glasses, contacts and even Lasik surgery to correct vision. Cosmetic surgery doesn't qualify.

One advantage you may not have considered is that the accounts allow you to spend the money before it's been deducted from your paycheck, the equivalent of an interest-free loan. If you commit to setting aside $20 a week, the entire $1,040 will be available to you January.

Many employers also offer a flexible spending account for child care expenses.

Q. I own shares of mutual funds, three of which will make capital gains distributions in mid-December. I plan to redeem my shares. At this point the capital gains or losses are not significant. Am I better off to redeem them before or after the capital gains distribution?

A. If you plan to redeem your shares, you might as well do it before the distributions. The distributions will be taxable income. The net asset value of each fund will decline by the amount of its distribution, reducing your gain or increasing your loss on your eventual sale. That's likely to be a wash, but not necessarily. For example, if you take the distribution in December, you report it on your 2000 tax return, but if you don't sell your shares until January, you postpone the benefit of the capital loss until your 2001 return.

Of course, I cannot predict what the stock market will do in the meantime. That's likely to have a bigger effect on your return than the tax issue.

Q. Is there a set amount that a parent should charge an adult child who is living at home? I don't think my daughter is charging her children enough, and they're just wasting their money.

A. I am afraid this is a matter that each family has to resolve for itself. Many parents struggle with conflicting desires: They want to help their children get established in the world, but they also want their children to become self-supporting. This can be an emotional issue, so I'd be careful about giving advice unless your daughter has asked for it.

Here is one idea: If the goal is to encourage the children to move out, your daughter might set an escalating rate that increases a specified percentage each month. Once the rate at mom's hotel begins approaching the cost of maintaining a separate apartment, the fledglings probably will decide to leave the nest.

I would be interested in hearing from readers on how they encouraged their adult children to become financially independent. If you have an idea to share, send it my way.

Online money map

If you enjoy bargain-hunting, you might want to check out some of the many Web sites that offer leads on discount deals. Here are just a few of them: Amazing-Bargains.com (http://www.amazing-bargains.com), a2zdeals.com (http://www.a2zdeals.com), Bargain Bliss (http://www.bargainbliss.com) and Deal-Finder (http://www.deal-finder.com).

-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or to huntley@sptimes.com by e-mail.

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