For me, there is usually only two times per year that my paycheck will change, January and April. The January changes are the result of benefit changes for that year and the April changes are the result of any salary increases. With my company’s recent Open Enrollment, I had to do some analysis on potential changes to my take-home pay. I was pleasantly surprised by the results.
To begin, I have to talk about how my income in 2013 is different than most years. I was lucky to receive a nice bonus in 2013, so that helped push my compensation higher in 2013. The largest difference for this year was the IRA I inherited from my mother. I know I could have continued the IRA, but for a variety of reasons I elected to receive a lump sum distribution. In order to cover the taxes I owed, I adjusted my withholdings to ensure that I would have enough taxes taken out. What this means for 2014 is that I can readjust my withholdings, so that less tax is taken out. I don’t like receiving a large refund when I file.
2014 Benefit Changes
As I mentioned earlier, my company’s annual Open Enrollment period just occurred. Costs were naturally increasing for 2014, but there were some things I could do to mitigate the impact. Since I am in a more secure financial position than I was last year, this allowed me to elect higher deductible plans for both my medical and dental plans. By selecting the High-Deductible plan for the medical option, I became eligible for a Healthcare Savings Account (HSA). An HSA allows you to set aside money pre-tax to pay for qualified medical expenses. An HSA differs from a flexible spending account (FSA) in that contributions can be carried over to the next year and the HSA contributions can be invested. Since my wife and I were planning on setting aside extra money for medical costs anyway, this seemed like the perfect way to save on taxes. We elected to contribute the maximum amount allowable, which is $6,550 for someone my age. Included in the $6,550 is a contribution of $800 from my employer, so my net contribution is $5,750. That means I am able to reduce my taxable income by $5,750 for next year. That income would have fallen into the 10% Federal tax bracket, so that is a savings of $575 in federal taxes. In addition, I will also save $287 in state income taxes and $439 in Social Security and Medicare taxes. My total tax savings will be $1301. This just keeps getting better and better.
When I began to run various scenarios for what my take-home pay would look like, I realized that I could also increase my 401K contribution. I currently contribute 6% and my employer matches that 6% plus an additional guaranteed 2%, for a total of 8%. I am going to be raising my contribution to 7%, so with my employers contributions, I will be up to a total of 15%.
Take-Home Pay Impact
After all the changes above, my take-home pay was going to be reduced by about $200 a month. My expenses are certainly not going down $200 a month, so you might wonder how I am making up the difference. As I said before, I was already planning on setting aside money for medical expenses. What I will do now, is that money will make up the difference between my current paycheck and my paycheck in January. I will put the money into savings still and then just transfer the $200 a month from my savings into my checking account. In the end, I end up saving more money overall. I had to run the numbers a few times to make sure my calculations were correct. How did your benefits change for next year?