Tips for funding your dependent care account
It’s not always simple to determine the right amount to add to your account
At the end of the year, employee’s thoughts can turn to decisions they need to make for the next twelve months. One of these decisions involves making annual decisions about work benefits such as determining how much of an allocation to make to dependent care accounts.
The decisions for funding dependent care accounts are important: If you don’t put away enough money, you won’t get as many of the tax benefits as you’re entitled to. If you put away too much, you risk losing money in an account where the funds don’t roll over to the next fiscal year. We’ve got a couple of things you can keep in mind so that you can find an amount that works for your situation.
Know what kinds of things are allowable expenses for the account
Start the process by gaining a clear understanding of what kinds of expenses are allowed to be used. While the account certainly covers daycare and babysitting that support your employment, there are a range of other reimbursable expenses to be aware of.
A lot of parents don’t realize that their dependent care account covers a range of types of family care. These include costs to care for an older relative that needs assistance or supervision while you’re at work. It can also include any care that you pay for while your child is sick and you have to leave home for work, and costs for payroll taxes if you have a more formal structure for your care. Lastly, it covers costs for any transportation that’s related to care.
Consider how much childcare you’re going to need to have
Once you have a sense of the range of items that are covered, take time to dial in on exactly what kind of childcare expenses you’ll be paying for. As you think through your needs, look past the obvious daycare expenses or nanny costs that you need to go to work. Consider the costs you spend on summer camp or school break care. Also, if you employ a housekeeper or an Aupair that also covers childcare while you work, be sure to break out the hours that they spend on childcare rather than housekeeping tasks.
Making final decisions about funding your account
Once you’ve totaled all your expenses, you should have an idea of how much you’ll want to set aside for spending from your dependent care account. It’s possible that there’s a maximum amount to set aside, per your account. If so, because of the tax benefits involved in using your account, many experts recommend that you set aside an amount until it reaches the max amount, provided you are 100% sure that you will have this much in spending needs.
The decisions for funding dependent care accounts are important: If you don’t put away enough money, you won’t get as many of the tax benefits as you’re entitled to. If you put away too much, you risk losing money in an account where the funds don’t roll over to the next fiscal year.
Once you’ve got an idea of what your expenses are, the amount may surprise you. Most experts recommend that if you’re sure this is what you’ll be spending, add as much of it to your account as possible because those dollars are placed there on a pre-tax basis.
You may find that funding this amount places too big a dent in your paycheck. If that’s the case, you’ll have some decisions to make. Reconsider how likely it is that your initial numbers were confirmed numbers that you’ll have to spend, or if they’re optional costs. If they are mandatory, keep in mind that, ultimately, these costs are going to put a dent in your paycheck one way or the other. If you place them into your dependent care account, they’re taken from your account on a pre-tax basis. Ultimately, that stretches your paycheck a little bit further.
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