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Whether you’re purchasing a new pair of eyeglasses, stocking up on over-the-counter medications, or paying for your child’s daycare, there may be certain expenses your health insurance plan doesn’t cover.

In those cases, having a flexible spending account, or FSA, could help you save money. This special savings account lets you set aside pretax dollars to pay for eligible out-of-pocket healthcare expenses, which in turn can lower your taxable income.

Let’s take a look at how these accounts work.

What Is an FSA?

An FSA is an employer-sponsored savings account you can use to pay for certain health care and dependent costs. It’s commonly included as part of a benefits package, so if you purchased a plan on the Health Insurance Marketplace, or have Medicaid or Medicare, you may no longer qualify for a FSA.

There are three types of FSA accounts:

•   Health care FSAs, which can be used to pay for eligible medical and dental expenses.

•   Dependent care FSAs, which can be used to pay for eligible child and adult care expenses, such as preschool, summer camp, and home health care.

•   Limited expense health care FSA, which can be used to pay for dental and vision expenses. This type of account is available to those who have a high-deductible health plan with a health savings account.

How Do You Fund an FSA?

If you opt into an FSA, you’ll need to decide on how much to regularly contribute throughout the year. Those contribution amounts will be automatically deducted from your paychecks and placed into the account. Whatever money you put into an FSA isn’t taxed, which means you can keep more of what you earn.

Your employer may also throw some money into your FSA account, but they are under no legal obligation to do so.

You can use your FSA throughout the year to either reimburse yourself or to help pay for eligible expenses for you, your spouse, and your dependents (more on that in a minute). Typically, you’ll be required to submit a claim through your employer and include proof of the expense (usually a receipt), along with a statement that says that your regular health insurance does not cover that cost.

Some employers offer an FSA debit card or checkbook, which you can use to pay for qualifying medical purchases without having to file a reimbursement claim through your employer.


💡 Quick Tip: When you have questions about what you can and can’t afford, a spending tracker app can show you the answer. With no guilt trip or hourly fee.

What Items Qualify for FSA Reimbursement?

The IRS decides which expenses qualify for FSA reimbursement, and the list is extensive. Here’s a look at some of what’s included — you can see the full list on the IRS’ website.

•   Health plan co-payments and deductibles (but not insurance premiums)

•   Prescription eyeglasses or contact lenses

•   Dental and vision expenses

•   Prescription medications

•   Over-the-counter medicines

•   First aid supplies

•   Menstrual care items

•   Birth control

•   Sunscreen

•   Home health care items, like thermometers, crutches, and medical alert devices

•   Medical diagnostic products, like cholesterol monitors, home EKG devices, and home blood pressure monitors

•   Home health care

•   Day care

•   Summer camp

Are There Any FSA Limits?

For 2025, health care FSA and limited health care FSA contributions are limited to $3,300 per year, per employer. Your spouse can also contribute $3,300 to their FSA account, as well.

Meanwhile, dependent care FSA contributions will be increased to $7,500 per household, or $3,750 if you’re married and filing separately, on January 1, 2026.

Does an FSA Roll Over Each Year?

In general, you’ll need to use the money in an FSA within a plan year. Any unspent money will be lost. However, the IRS has changed the use-it-or-lose-it rule to allow a little more flexibility.

Now, your employer may be able to offer you a couple of options to use up any unspent money in an FSA:

•   A “grace period” of no more than 2½ extra months to spend whatever is left in your account

•   Rolling over up to $660 from 2025 to use in the 2026 plan.

Note that your employer may be able to offer one of these options, but not both.

One way to avoid scrambling to spend down your FSA before the end of the year or the grace period is to plan ahead. Calculate all deductibles, copayments, coinsurance, prescription drugs, and other possible costs for the coming year, and only contribute what you think you’ll actually need.

Recommended: Flexible Spending Accounts: Rules, Regulations, and Uses

How Can You Use Up Your FSA?

You can consider some of these strategies to get the most out of your FSA:

•   Buy non-prescription items. Certain items are FSA-eligible without needing a prescription (but save your receipt for the paperwork!). These items may include first-aid kits, bandages, thermometers, blood pressure monitors, ice packs, and heating pads.

•   Get your glasses (or contacts). You may be able to use your FSA to cover the cost of prescription eyeglasses, contact lenses, and sunglasses as well as reading glasses. Contact lens solution and eye drops may also be covered.

•   Keep family planning in mind. FSA-eligible items can include condoms, pregnancy tests, baby monitors, and fertility kits. If you have a prescription for them, female contraceptives may also be covered.

•   Don’t forget your dentist. Unfortunately, toothpaste and cosmetic procedures are not covered by your FSA, but dental checkups and associated costs might be. These could include copays, deductibles, cleanings, fillings, X-rays, and even braces. Mouthguards and cleaning solutions for your retainers and dentures may be FSA-eligible as well.


💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.

Flexible Savings Account (FSA) vs. Health Savings Account (HSA)

When it comes to managing healthcare costs, another popular option is a health savings account (HSA). Both FSAs and HSAs offer tax advantages, but they differ in terms of eligibility, contribution limits, and how the funds can be used.

Both types of accounts:

•   Offer some tax advantages

•   Can be used to pay for co-payments, deductibles, and eligible medical expenses

•   Can be funded through employee-payroll deductions, employer contributions, or individual deductions

•   Have a maximum contribution amount. In 2025, people with individual coverage can contribute up to $4,300 per year, while those with family coverage can set aside up to $8,550 per year.

That said, there are some key differences between HSAs and FSAs:

•   You must be enrolled in a high deductible health plan in order to qualify for an HSA.

•   HSAs do not have a use-it-or-lose-it rule. Once you put money in the account, it’s yours.

•   If you quit or are fired from your job, your HSA can go with you. This happens even if your employer contributed money to the account.

•   If you’re 55 or older, you can contribute an additional $1,000 to your HSA as a catch-up contribution — similar to the catch-up contributions allowed with an IRA.

•   If you withdraw money from your HSA for a non-qualified expense before the age of 65, you’ll pay taxes on it plus a 20% penalty.

•   If you withdraw money from your HSA for any type of expense after age 65, you don’t pay a penalty. However, the withdrawal will be taxed like regular income.

Recommended: Benefits of Health Savings Accounts

The Takeaway

Flexible spending accounts are offered by employers and can be a useful tool for paying for health care or dependent-related expenses. Notably, you fund the account with pretax dollars taken from your paycheck, which can lower your taxable income and help you save money.

You typically need to spend your FSA money within a plan year, though your employer may give you the option to either roll over a portion of the balance into the next year or use it during a grace period. There are also guidelines around what you can spend the FSA funds on and how much you can contribute to your account.

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FAQ

How does a flexible spending account work?

A flexible spending account (FSA) lets you set aside pretax money from your paycheck to cover eligible medical, dental, vision, or dependent care expenses. Because contributions reduce your taxable income, you save on taxes.

What is the difference between an FSA and an HSA?

The main difference between an FSA and an HSA is ownership and eligibility. FSAs are employer-owned and require you to spend funds within the plan year, while HSAs are individually owned, available only with high-deductible health plans, and allow funds to roll over and grow tax-free year after year.

Can I withdraw money from my flexible spending account?

Yes, you can withdraw money from your flexible spending account (FSA) to pay for eligible medical expenses such as copays, prescriptions, and medical supplies. However, withdrawals must be for qualified expenses.

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This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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While stock options derive their value from the performance of a single stock, index options are derivatives of an index containing multiple securities. Indexes can have a narrow focus on a specific market sector, or may track a broader mix of equities. They’re listed on option exchanges and regulated by the Securities and Exchange Commission (SEC) in the U.S.

Like stock options, the prices of index options fluctuate according to factors like the value of the underlying securities, volatility, time left until expiration, strike price, and interest rates. Unlike stock options, which are typically American-style and settled with the physical delivery of stocks, index options are typically European-style and settled in cash.

What Is An Index Call Option?

An index call option is a financial derivative that reflects a bullish view on the underlying index. They provide the buyer the right to receive cash if the index rises above the strike price on expiration. An investor who buys an index call option typically believes that the index will rise in value. If the index increases in value, the call option’s premium may also increase before expiration.

Before trading index options, it may be a good idea to make sure you have a solid understanding of what it means to trade options in a broader sense. It can be a complex, technical segment of the financial market.

💡 Quick Tip: In order to profit from purchasing a stock, the price has to rise. But an options account offers more flexibility, and an options trader might gain if the price rises or falls. This is a high-risk strategy, and investors can lose money if the trade moves in the wrong direction.

What Is An Index Put Option?

An index put option is a contract that reflects a bearish outlook. An investor who buys this derivative typically expects that its underlying index will decline in value during the life of the contract.

Differences Between Index Options and Stock Options

In addition to the fact that index options are based on the value of an underlying index as opposed to a stock, there are several other key differences between trading index options and stock options.

Trading Hours

Broad-based index options typically stop trading at 4:15pm ET during regular trading hours, with certain contracts on indexes eligible to continue trading from 4:15pm to 5:00pm ET. Some index options offer global trading hours from 8:15am-9:15am ET the following day.

When significant news drops after the market closes, it may affect the prices of narrow-based index options and stock options. Broad-based indexes may be less likely to be affected, as they typically reflect a more diversified mix of sectors within the index.

Recommended: When Is the Stock Market Closed?

Settlement Date and Style

While stock options use the American-style of exercise, which allows holders to exercise at any point leading up to expiration, most index options have European-style exercise, which allows exercise only at expiration (with some exceptions). That means the trader can’t exercise the index option until the expiration date. However, traders can still close out their index option positions by buying or selling them throughout the life of the contract.

As for settlement date, most stock index options usually stop trading on the Thursday before the third Friday of the month, with the settlement value typically determined based on Friday morning prices and processed that same day. Stock options, by contrast, have their last trading day on the third Friday of the month, with settlement typically processed the following business day.

Settlement Method

When settling stock options, the underlying stock typically changes hands upon the exercise of the contract. However, traders of index options typically settle their contracts in cash.

That’s because of the large number of securities involved. For example, an investor exercising a call option based on the S&P 500 would theoretically have to buy shares of all the stocks in that index.

What Are Options Trading Levels?

Some options trading strategies are more straightforward and may involve relatively lower investment risk compared to others. But there are ways to use options that can get rather complicated and may carry substantial risk. These strategies can typically be used with index options, though they may be subject to different expiration rules and brokerage approval standards. Some basic strategies (like buying puts) are widely accessible, while more complex trades involving spreads or uncovered positions also exist.

To help ensure investors are aware of the risks associated with various strategies, brokerages have something called options trading levels. Brokerages have enacted these levels to try to deter new investors from trading options they may not fully understand and experience significant losses in a short period.

If a brokerage determines that an investor faces a lower risk of seeing significant losses, and has the level of experience needed to manage risk, they can assign that investor a higher options trading level. Higher options levels open up a user’s account to additional investment strategies, which may enable them to trade different types of options.

Most brokerages offer four or five trading levels. Reaching all but the highest level usually requires completing a basic questionnaire to assess an investor’s knowledge.

Options Trading Level 1

This is the lowest level and typically allows a user to trade the simplest options only, such as covered calls and protective puts. A covered call is when an investor writes an out-of-the-money call option on stocks they own, and a protective put is when an investor buys put options on stocks already held.

These strategies require the trader to hold shares of the underlying stock, which may make these trades less risky than many others. There is also only one option leg to worry about, which can make executing the trade much simpler in practice.

Options Trading Level 2

Level 2 typically grants the right to buy calls and puts. The difference between level 2 and level 1 is that traders at level 2 can take directional positions. Most new traders are typically approved to start at this level.

Options Trading Level 3

At level 3, more complex strategies may become available. This level usually includes approval and margin to trade debit spreads. Though relatively complicated to execute, debit spreads may limit risk since the trader’s maximum loss is usually capped at the cash paid to buy the necessary options.

Options Trading Level 4

Level 4 may include permission to trade credit spreads, and is sometimes included in level 3 (in which case the brokerage would have only 4 levels). A credit spread functions similarly to a debit spread, although the trader receives a net premium upfront.

Calculating potential losses can be more complicated at this level. It is here that novice traders may inadvertently take on tremendous risk.

Options Trading Level 5

Level 5 involves the highest risk and may permit traders to write call options and put options without owning shares of the underlying stock. These trades expose investors to potentially unlimited losses and may be suitable only for very experienced options traders.

The most important requirement of level 5 is that an investor maintains sufficient margin in their account. That way, if an options trade moves against the investor, the broker can use the margin account to help cover potential losses.

Recommended: What Are Naked Options?

What Happens to Index Options On Expiry?

Most index options have a European-style exercise, although some index option series may differ. This means traders can only execute them at expiration. Investors may want to research which type of settlement their index options have before making a trade.

Upon expiration, the Options Clearing Corporation (OCC) may assign the option to one or more Clearing Members who have short positions in the same options. The Clearing Members may assign the option to one of their customers.

The index option writer is then responsible for paying any cash settlement amount. Settlement usually takes place on the next business day after expiration.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

How to Trade Index Options

Trading index options may be one type of investment to consider as part of a broader diversified portfolio. For the most part, trading index options works like trading any other option. The big difference is that the underlying security will be an index, rather than a stock.

Here are a few basic steps that investors can consider when starting to trade index options.

•  Request authorization from your brokerage for options trading

•  Review how option chains are reflected in your brokerage account

•  Study different option trading strategies and consider those that align with your level of expertise

•  Before trading, develop a strategy for managing risk and closing out positions, if needed.

•  Place a trade through your brokerage platform’s options account and monitor your trades.

The Takeaway

Index options are similar to stock options in that they are both financial derivatives. They are rooted in indexes, though, which typically reflect a segment or sector. Trading options and index options is a more complex strategy involving higher risk, and may not suit every investor’s risk tolerance.

Index investing with index options could appeal to investors looking to hedge their portfolios with alternative or derivative-based investments.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Frequently Asked Questions

What are examples of index options?

Examples of index options include contracts based on the S&P 500 (SPX), Nasdaq-100 (NDX), and Russell 2000 (RUT). These index options let traders take positions on overall market segments rather than individual stocks. Index options are typically cash-settled and European-style, meaning they may only be exercised at expiration.

What is the difference between stock options and index options?

Stock options are tied to individual companies and often involve share delivery. Index options, on the other hand, track a broader market index and are usually cash-settled. Most stock options are American-style, whereas index options are commonly European-style, meaning they can only be exercised at expiration.

What is the risk of index options?

Index options carry risks, including the potential for significant losses. Sudden shifts in economic conditions can affect their value, given that they track broad market movements. Strategies like selling uncovered options can involve high risk and aren’t suitable for all investors.

What are S&P 500 index options?

S&P 500 index options (SPX) are contracts based on the S&P 500. They’re cash-settled, European-style, and commonly used to hedge or speculate on overall market performance. SPX options are popular for their liquidity and broad market exposure.

Photo credit: iStock/kate_sept2004