Save Money with Pre-Tax Accounts

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Save Money with Pre-Tax Accounts

If your employer offers specialized accounts such as flexible spending accounts or health savings accounts, you can save money to pay for childcare, healthcare and commuting expenses. You can specify that a certain amount of money will be deducted from your paycheck to be put into an account to pay for childcare, healthcare or even public transportation or parking expenses associated with your employment.

Types of Pre-Tax Accounts

To be eligible to contribute to one of these types of accounts, your employer must offer them. So check with your employer first to see which accounts are available and how to go about setting one up. The most commonly available accounts are healthcare flexible spending accounts, dependent care flexible spending accounts, and health savings accounts.

With any of these types of accounts, the money that you set aside is used to pay for specific expenses, typically via a debit card that is issued specifically for that purpose. Because funds are taken out of your paycheck before taxes, that money goes farther than if you paid for those funds without the benefit of one of these specific types of spending accounts.

How Pre-Tax Accounts Can Help

For example, if you needed dental work that cost $1,000, it could be advantageous to utilize pre-tax dollars from an employer healthcare flexible spending account or a health savings account as opposed to the after-tax dollars that may be sitting in your checking account for example. While the cost of the dental work will not change, the amount of taxes you pay in the process would. These types of health care savings accounts pay for a wide variety of medical expenses, including prescriptions, doctor’s visits, hospitalizations, surgery, medical tests, dental work and other medical procedures.

The same logic holds true for childcare expenses if your employer if your offers a dependent care flexible spending account. The amount of taxes you pay when dealing with these expenses could be less than they would be if you simply utilized your after-tax cash account.

You don’t have to save the entire amount of your medical or childcare bills, just whatever you want to or can afford. But you can save a significant amount of money by using these types of accounts.

The federal government allows employers to also offer a transportation flexible savings account, which can be used to pay for qualified transportation costs such as public transportation or parking costs.

How Much Can You Save through Pre-Tax Accounts?

There are limits on how much you can save through these various types of accounts, and different rules apply to them. You can only open a health savings account if you have a high-deductible health insurance plan. An individual can save $4,300 a year in 2025 for this type of account, while a family can save up to $8,550. The funds roll over year-to-year. Individuals 55 or older can contribute an extra $1,000.

That’s not true for a healthcare flexible spending account, where you generally must spend the money in the account by the end of the year. The IRS now allows for two exceptions to this rule of which your employer may choose to elect one: you may roll over $660 from one year to the next or the money must be spent by the end of a two-and-a-half-month grace period at the end of the year.

For 2025, contributions to a healthcare flexible spending account are limited to $3,300 a year. Contributions to a dependent care flexible spending account are limited to $5,000 a year or $2,500 a year (based on your tax filing status). For a transportation spending account, the limit is $325 a month for qualified commuting expenses and $325 a month for qualified parking expenses.