When managing your spending, the first place to start is to maximize the benefits of pre-tax benefit accounts offered through your employer. Not only is there a tax benefit by placing part of your paycheck in a pre-tax benefit accounts, but the money is also deducted directly from your paycheck. This is the most beneficial way for many to save as, you can’t spend it if you don’t have it.
Take Advantage Of Employer Sponsored Retirement Plans
The first pre-tax benefit account to fund from your paycheck is your 401k or 457b plan. If you can only save money in only one place, then this is the place to do it!
Maximize Your Employer Retirement Contribution
Not only do you get a tax deduction for your contribution, you also get tax free growth and in most cases an employer match. Most employers match 50% of the first 6% of your pay that you contribute, so you should start at 6% of your pay. From there, you should increase it by 1% a year as you get raises and promotions until you get to at least 10%.
Maximize The Catch-Up Contribution
Once you reach the age of 50, you should also start to take advantage of the catch-up provision allowed in these plans above the already 10% or more you are putting in the plan. Lastly, do not touch this money until you are ready to retire! No hardship loans or withdrawals. Let it grow, let it grow, let it grow!
Maximize FSA or HSA For Medical Expenses
Based on the medical plan available to you or your spouse, you will be able to put aside money for medical expenses in a Flexible Spending Account (FSA) or a Health Savings Account (HSA). The details of the FSA and HSA are too much to cover in this post. Therefore, I recommend that during open enrollment, you check out which one is available to you, and that you fully understand the annual limits and the rules and regulations of the one available to you.
From a spending standpoint, the FSA and HSA accounts, are a great way to put aside money for medical expenses. Additionally, with proper planning , they can help you save money, too. My daughter wanted to switch from monthly use contact lenses to daily use contact lenses. However, the cost was much greater for the daily use contacts. She saw that if she bought a one year supply of daily use contacts, she would be eligible for a $150 rebate. So she calculated net cost, after the rebate. During open enrollments she increased her FSA by net amount, after rebate, for the following year. So this year she ordered her daily use contacts, and received the $150. She then submitted a claim against her FSA account to get reimbursed for the net cost of the contacts.
Explore Other Pre-tax Benefit Accounts Available to You.
Explore other pre-tax benefit accounts available to you, such as commuting and parking benefit accounts. Since my daughter commutes to work by train each work day, she purchases a monthly pass. Her employer offers a pre-tax commuting FSA. During open enrollment, she calculates the annual cost of her monthly pass and divides this amount by the number of pay periods in the year. Accordingly, this amount is then deducted pre-tax from each paycheck. Each month, she then reloads her monthly pass directly from this pre-tax commuting FSA account.
Taking advantage of pre-tax benefit accounts is not only a great way to save on taxes but a great way to help you manage your monthly spending.
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