In this week's Coffee with Waymark, Brendan spills the beans on how you can save big with your employer benefits. We’ll chat about maximizing your 401(k) contributions, decoding health insurance plans and taking full advantage of HSAs and FSAs. So grab your cup of coffee and join us for some insights and practical tips to make sure you're maximizing your employer benefits.
Getting maximum value from employee benefits
401(k) vs. Roth 401(k) vs. Roth IRA
HMO, PPO, and High Deductible plans
Health Savings Accounts (HSA) and Flexible Savings Accounts (FSA)
Hi, and welcome to another edition of Coffee with Waymark. Today we're going to talk about employer benefits. It's about the time that employers are going to start sending around open enrollment forms and election decisions and things like that. And this is a huge opportunity for you to save some money.
One of the things I mentioned in the last Coffee with Waymark episode about cash is that even the smallest pieces of advice that we can provide, can potentially offset many of the fees that we charge for our services. And this is another area where people leave a lot of money on the table by not fully taking advantage of their benefits at work. And it truly is a shame because you see it all the time that people aren't fully taking advantage of their open enrollment, just simply kind of fill it out on the last day that you're supposed to fill it out. And as I mentioned, they leave a lot of money on the table.
So we're going to talk about a handful of different programs that you can take advantage of. And really the sweet spot. And this one I'm going to kind of focus on is a person who has a family, is 55 or older, and is in the top tax bracket. That's really the sweet spot. And when it comes to any of these benefits typically revolve around taxes. People in the highest tax brackets are typically the ones that benefit the most from employer benefits, and those that are in the lowest tax brackets, not as much. But we'll talk about each one of them as we go through.
So let's start, and I'll start sharing my screen here. We'll start with 401(k)’s. So with 401(k)’s, you can contribute $22,500 of your own money in and then the employer could match that. In addition to that, if you're 50 or older, you can actually make another $7,500 On top of that for a total of $30,000. So the rule of thumb with 401(k)’s is you should try to contribute as much as you possibly can for the tax deduction, if you're using the traditional 401(k). I'll talk to you about the Roth 401(k) in a moment. But with the traditional 401(k), you should try to withhold as much or contribute as much as you possibly can. Because again, the more you can contribute, the less your income and therefore the less tax that you ultimately have to pay. Now that money will grow tax deferred and then at about your mid 70s, you'll need to actually start taking money out of that and paying tax on it at that point. Hence the deferred, not tax free. So most people know all this.
But just a good little reminder for everyone as it pertains to Roth 401(k)’s huge, huge benefit here is that if you have the ability to contribute to a Roth 401(k), one of the things that you don't have to worry about is income restrictions. So even Elon Musk could contribute to a Roth 401(k), whereas he could not contribute to a Roth IRA. So big difference between Roth 401(k) and Roth IRA. So that's a huge benefit that's available to you if your employer allows you to make Roth 401(k) contributions and you can contribute up to this $30,000 into a Roth 401(k). However, just be aware that if you do take advantage of the Roth, you do not get a tax deduction upfront. But when you do take the money out, the money you take out plus any of the growth that you've had in the portfolio is tax free. So you don't get a benefit today, but you get a benefit tomorrow with the Roth 401(k).
So again, when you're in the top tax bracket, you really have to think about that. And we've had a number of conversations with some of my clients about do you contribute to the traditional 401(k) and take the tax deduction? The answer most of the time when you're in the top tax brackets, yes, that you go on the traditional side. However, if you're in the lower tax brackets or simply want to diversify your tax exposure, then you should Look at the Roth 401(k). So that's the 401(k). At the minimum, definitely another rule of thumb here that every so often there's an exception, but I'd say 99% of the time, contribute at least the amount that's going to max out the company match for you. So that's 401(k).
Next thing is health saving, or it's just a health insurance. So health insurance, everyone is always very surprised by this. Usually, again, rules of thumb when it comes to health insurance, is that if you are offered an HMO or a PPO, versus a high deductible insurance policy that has the HSA or the health savings account attached to it, you typically go for the aid of the HMO and the PPO, if your family has health issues, or you know that this specific year is going to be a big year for health for whatever purpose. The again, rule of thumb is on the High Deductible side, you want to go with that if the medical needs of your family are going to be a little bit lower. But the other reason why you might want to opt for the high deductible plan with the Health Savings Accounts attached to it, again, comes down to tax. If you're in the highest tax bracket, being able to max contribute to a health savings account is very, very beneficial for you. Some people actually even use it as a IRA for themselves. And I'll talk to you about that in a moment. And on the flip side, if your tax rate is lower than the HSA is not going to be as attractive to you. And then we get into flexible savings accounts.
Flexible savings accounts are probably one of the most underutilized benefits that are out there. If you have kids, and if you have daycare, take advantage of the dependent care FSA, you set aside $5,000, again, $5,000, that you're not going to be taxed on. You pay for the daycare, and then you remember you work with the Flexible Spending dependent care provider to get reimbursed for that money tax free. That's $5,000. It's money so many people who have kids are leaving on the table and I just don't understand why they don't use it.
The other thing that you can take advantage of is flexible savings accounts. So if you go the HMO PPO route, you still could contribute as a family to a Health Care Flexible savings account. And that will operate very similar to a health savings account, where it covers deductibles and co pays, and even things as mundane as feminine hygiene products. So flexible spending accounts are truly that very flexible. But even if you do go with the HSA, the Health Savings Account, you can still contribute to a flexible savings account. However, it's called a limited purpose flexible savings account. You can still contribute up to that $3,050 limit that the other folks can contribute to, but it's limited to only vision and dental does not impact doctor's visits.
So long story short, as you see from my spreadsheet here, if you are age 55 plus, and you max contribute to your traditional 401(k), you max contribute to your health savings account, in this specific case, if you're taking advantage of the health savings account, you're you could also contribute $3,050 to a limited purpose flexible savings account. And you have kids that are in daycare, you could you could earmark or I should say you can postpone taking I'm not talking about this accurate. You can contribute to all these programs to the maximum of this $46,800. And if you're in the top tax bracket of 37% that ultimately works out to an over $17,000 benefit that a lot of people are not fully taking advantage of.
So long story short there's a lot of money that's out there with benefits. And as an employer myself, we spend time trying to craft an attractive benefits package. Take advantage of it because it is real money. And that money can be left on the table. If especially you're in one of the top tax brackets, you really should be spending a little bit more time looking at your open enrollment options.
So that's what we have for this week. If you have any questions about this, that they that obviously things do get complicated. We didn't even touch on some of the other benefits. Like employee stock purchase plans and things like that. So if you do have any questions about open enrollment, please please reach out to Waymark and we can help you out. So thanks for listening and we'll see you next time.
Brendan is the Managing Director for Waymark Wealth Management. He has extensive experience in comprehensive wealth management. His focus includes retirement planning, behavioral finance, investment portfolio construction, education funding, insurance & risk management, taxes, charitable giving, and estate planning. Brendan has an ability to take clients' complex visions and distill them down to simple action plans, helping them move from where they are today to where they want to be tomorrow.
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