Practical Money Skills For Life: Year-End Benefit Review Could Lower Your Taxes
Practical Money Skills For Life
Year-End Benefit Review Could Lower Your Taxes
If you could save hundreds of dollars on your taxes with just a few minutes' work, would you? I thought so.
Before getting caught up in the holiday rush, take a moment to review your employer-provided benefits and see if these year-end tips apply:
Maximize 401(k) savings. Many employers offer 401(k), 403(b) or 457 plans that let you set aside money for retirement on a tax-deferred basis; that is, where you don't pay federal or state income taxes on your savings or their investment earnings until you withdraw them at retirement. These plans often match a percentage of your savings - commonly 50 percent or more on up to 6 percent of income saved. That's like a 50 percent return on your investment.
If you're not contributing at least enough to take advantage of this match, you may be leaving hundreds of dollars on the table. There still may be enough time to catch up for 2007: Ask your Benefits department if you can make a one-time increase to your December 401(k) paycheck deduction. Or better yet, try to permanently increase the percentage saved going forward.
While you're at it, examine your investment fund mixture to ensure it still matches your needs. For example, people approaching retirement sometimes move to more conservative funds. Ask a financial professional for help determining your tolerance for investment risk and which fund options you should choose.
Use up Flexible Spending Account (FSA) balances. Health care and dependent care FSAs (also known as reimbursement accounts) let you use pretax dollars for expenses you would have had anyway - thereby lowering your taxable income and thus, your taxes. But factor in your plan's 2007 spending deadlines so you don't forfeit any leftover dollars. Many employers now allow a grace period of up to 75 days to use up 2007 account balances; ask your Benefits department to be sure.
If there's money left in your Health Care FSA, consider qualified purchases you could make before the deadline, such as new eye glasses, contact lenses, braces, or over-the-counter medicines. Check IRS Publication 502 for a complete list of allowable expenses at www.irs.gov. On the other hand, if you've already used up your 2007 FSA account balance, think about which elective expenses you could postpone until early 2008.
To learn more about 401(k) plans and FSAs, go to Practical Money Skills for Life, a free personal financial management site sponsored by Visa (www.practicalmoneyskills.com/benefits).
Check deductibles and annual plan limits. Health plans often have calendar year-based restrictions so plot out your expenses carefully. For example, if your dental plan has an annual dollar limit for crowns and you know you need two replaced, ask your dentist about possibly doing one this year and one after January 1. And, if orthodontia for the kids is looming, ask your dental office for help scheduling the work so you can reap maximum advantage from your plan.
Similarly, if your vision plan only pays for new frames every other year, figure out if you should buy a new set this year or wait until next year. It may be better to replace only the lenses now.
It's easy to just sign up for benefit plans once a year and then forget about them, but it can really pay to stay on top of how they work and plan your expenses strategically.
Jason Alderman directs Visa USA's financial education programs. To sign up for a free monthly personal finance e-Newsletter, go to www.practicalmoneyskills.com/newsletter.