Dear Clients and Friends,
I always find the Fall to be a great time to slow down and take stock. With all of the summer fun, vacations and activities providing a nice warm glow to our lives, we can turn our attention to personal and family goals. And, of course, our finances. Between Labor Day and Halloween there is a glorious couple of months of low activity that can be an excellent time to get things done. After Halloween, it's a frenetic ramp up to the Holidays which will leave us sleep deprived, sun deprived and probably five pounds heavier!
With that said, I'd like to talk this quarter about ...
Getting the Most From Your Company Benefits
(Or: How to Squeeze Your Boss, Without Asking for a Raise)
I make it a point to review client benefit plans. Sometimes I think that I'm the only person who ever reads them. Most times, I find that people's employers are much more generous than they know. Here's a list of the most common areas I find where people leave money on the table:
Last quarter we talked about how Mental Accounting can be used to our advantage with the 401(k) to help us achieve our goals. I think the advantages of the 401(k) are well understood, but I still occasionally see people who don't utilize it. It may be that your personal situation doesn't warrant it. For example, if there is no company match, or if the investments in the plan are substandard. Nevertheless, for pure convenience, the 401(k) is the granddaddy of savings vehicles: it's tax deferred, your contributions come directly from your paycheck and some programs have an option to automatically increase your contribution every year. So if you aren't taking advantage of all these conveniences, I want you to imagine a miniature me standing on your shoulder when you look at your paycheck whispering in your ear, "You should really consider using your 401(k) plan..."
On the other hand, if your company does provide a company match, I want you to imagine me screaming in your ear, "What the heck are you doing?!? You are giving away free money! Take it, please!" Or something to that affect. Believe it or not, I sometimes encounter people who don't take advantage of the company matching contributions. That's a shame. There are no guarantees in the investing game, so when someone offers to give you 100% return on your savings (or 50% depending on your program), you should really take them up on it. Really.
Tax advantaged accounts
For some reason, people don't view saving money on their taxes as real money. I'm not sure why. If you save $1,000 by reducing your tax bill it's exactly the same thing as saving money by negotiating a lower rate for your vacation to Dollywood (hey, don't criticize my vacations and I won't criticize yours). But it's much more fun to stick it to the government. And it's perfectly legal. There are three main ways to do this: the flexible spending account, the dependent care account, and the health savings account. Not every company offers all these options, but most large companies usually offer one or two. Let's look at each:
Flexible Spending Account (FSA)
The FSA allows you to save dollars pre-tax (i.e. you get a tax deduction) for medical expenses. The limit for 2013 is $2,500 (reduced from $5,000 previously by The Patient Protection and Affordable Care Act). The money is tax free as long as it is used for qualified medical expenses. Medical expenses can be quite varied, so make sure to check the definition that your company uses. Many expenses are covered and some, such as Lasik surgery, may be covered even though they are elective procedures and not covered under your normal insurance program. The big drawback of this program is that it is "use it or lose it". If you don't use the money you set aside in the plan year it is forfeit - so make sure not to overfund this account.
Dependent Care Flexible Spending Account (DCFSA)
This account allows you to save dollars pre-tax for dependent care expenses (such as child care). The limit for 2013 in $5,000 (this limit was not affected by The Patient Protection and Affordable Care Act). This covers common childcare expenses such as daycare and babysitting. This program too is "use it or lose it".
Health Savings Accounts (HSA)
HSAs are a special account that can only be used with a High Deductible Health Care Plan (HDHP). Have you had enough acronyms yet? For self-only coverage the deductible contribution limit is $3,250; for a family it is $6,450. The beauty of this program is that there is no "use it or lose it" clause in the HSA and contributions in this account can grow tax free until retirement.
Let's say you can participate in both a health and dependent care FSA. You can sock away $7,500 tax free. If someone is in the 25% Federal and 9.3% CA tax rate, the tax savings is $2,573. Remember, just because your taxes are deducted directly from your check doesn't mean that tax savings isn't real money. Take it and use it for something you find more valuable.
Employee Stock Purchase Plan (ESPP)
This is a program I really like, and many people miss. Not because I feel that employees should load up on employers stock. On the contrary, since your main source of income is tied to your employer, you should not over expose yourself to a large holding of employer stock. Rather, I like it when the company offers an employee discount when they purchase their stock. You see, many ESPPs buy the stock at a discount to the market price - often 15% off. Again, there are no guarantees in investing, so when someone offers you an easy 15% return, you should take it.
Here's how it works: companies generally withhold funds from your paycheck to purchase stock. Usually stock is purchased quarterly or every six months. Whatever the price is at the end of the trading day on the day of purchase, the company applies the discount and purchases stock for you. The next day, you sell your stock and pocket the discount! Resist the urge to hold the stock to see if you can pick up additional gains. Just sell it. Some periods, your stock will open higher the next day, sometimes lower, but on average, you will get to keep the money you made on the discount with this strategy. As an added bonus, some companies apply the discount to the price at either the beginning of the period or the end, whichever is lower. So if the stock was cheaper six months ago, then you get a discount off of the EARLIER price! Even better!
This is just a sampling of the more common employee benefits that you may be eligible for. Some companies provide a host of additional fringe benefits. From discounts on shopping, to gym memberships, to free employee concierge services, there could be a variety of things that your employer offers that you can take advantage of. They call them benefits for a reason, right? If you have any questions about employee benefits don't hesitate to contact me. Also, if your friends or family have questions about company benefits or any financial issue, please feel free to make an introduction or forward this letter. We provide Financial Planning and Investment Management services and would be happy to talk with your acquaintances. We will treat your friends and family with the same care and diligence that we treat you.
Note: The contents of this site are general in nature and not intended as specific investment advice. All investments are subject to risk; including loss of investment value. If you have any question regarding investments or concepts in these pages, please consult with an investment professional.