Phil's Personal Finance Tip of the Day:
8 Opportunities in Your Paycheck You May Be Missing
By Erik Carter | Forbes – Thu, Sep 6, 2012 6:17 PM EDT
When it comes to our paycheck, we tend to focus on the bottom line and think about how we’ll spend or save that money. But some of the most important decisions for our financial future are among the myriad of deductions above that line. Unfortunately, they’re often hastily determined in a flurry of paperwork when we first start a new job and are never revisited.
With summer coming to an end and open enrollment coming up for many employers, this is as good a time as any to take a closer look at your paycheck. In fact, the American Payroll Association decided to designate this week as National Payroll Week, which is a campaign to help American employees better understand their paychecks and their payroll-driven benefits. Let’s take a look at some of those deductions and how they can affect your financial well-being:
Tax Withholding
Estimated Payments: Having tax withheld from your paycheck allows you avoid penalties on not paying enough taxes throughout the year.
Pitfalls to Avoid: Having too much tax withheld means providing a no-interest loan to Uncle Sam. You can use the IRS’s withholding calculator, which will be available starting in mid-September, to estimate how many allowances to declare.
[More On Forbes: 10 Common Money Management Mistakes That You’re Probably Making]
Retirement Plans
Employer Match: If you’re fortunate enough to have an employer that matches part of your contributions, you’ll want to try to contribute at least enough to max the match. Otherwise you’re leaving free money on the table.
Tax Deferral: Pre-tax contributions allow you to defer the taxes until you withdraw the money from your plan. This has a couple of advantages. First of all, lowering your taxable income could make you eligible for additional credits and deductions. Second, you might be in a lower tax bracket in retirement if you’ll need less income than you make now. But even if you’re in the same tax bracket, you could still end up paying an overall lower rate in retirement since some of your income will be taxed at lower brackets. Finally, even if you pay the same tax rate, you’ll have the additional earnings on the money that would have gone to taxes each year.
Tax Free Growth: Some plans also allow Roth contributions, which can grow tax-free after 5 years and age 59 1/2. These can be particularly beneficial if you max out your contributions or expect to be paying a higher tax rate in retirement.
With summer coming to an end and open enrollment coming up for many employers, this is as good a time as any to take a closer look at your paycheck. In fact, the American Payroll Association decided to designate this week as National Payroll Week, which is a campaign to help American employees better understand their paychecks and their payroll-driven benefits. Let’s take a look at some of those deductions and how they can affect your financial well-being:
Tax Withholding
Estimated Payments: Having tax withheld from your paycheck allows you avoid penalties on not paying enough taxes throughout the year.
Pitfalls to Avoid: Having too much tax withheld means providing a no-interest loan to Uncle Sam. You can use the IRS’s withholding calculator, which will be available starting in mid-September, to estimate how many allowances to declare.
[More On Forbes: 10 Common Money Management Mistakes That You’re Probably Making]
Retirement Plans
Employer Match: If you’re fortunate enough to have an employer that matches part of your contributions, you’ll want to try to contribute at least enough to max the match. Otherwise you’re leaving free money on the table.
Tax Deferral: Pre-tax contributions allow you to defer the taxes until you withdraw the money from your plan. This has a couple of advantages. First of all, lowering your taxable income could make you eligible for additional credits and deductions. Second, you might be in a lower tax bracket in retirement if you’ll need less income than you make now. But even if you’re in the same tax bracket, you could still end up paying an overall lower rate in retirement since some of your income will be taxed at lower brackets. Finally, even if you pay the same tax rate, you’ll have the additional earnings on the money that would have gone to taxes each year.
Tax Free Growth: Some plans also allow Roth contributions, which can grow tax-free after 5 years and age 59 1/2. These can be particularly beneficial if you max out your contributions or expect to be paying a higher tax rate in retirement.
To read the entire article from Erik Carter | Forbes:
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