Should I Contribute To A Roth 401(k)?

Should I Contribute To A Roth 401(k)?

Employee Benefits

by | Oct 2, 2020 | Employee Benefits, General

Roth 401(k)s have become an increasingly popular alternative to traditional 401(k)s, allowing you to make after-tax salary deferrals to your employer plan. You may have the opportunity to contribute to a designated Roth account in your 401(k), but are uncertain about the best savings strategy for your personal circumstance.

This flowchart helps guide you through a series of considerations that will help in your decision on whether to contribute to a Roth 401(k), and covers:

  • Future tax rate expectations
  • Roth IRA eligibility
  • Employer matching considerations
  • RMDs and future rollover options
  • Additional savings opportunities through backdoor Roth contributions
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Healthcare HRA vs. FSA vs. HSA

Healthcare HRA vs. FSA vs. HSA

Employee Benefits

by | Sep 28, 2018 | Employee Benefits, Teachers, Weekend Pivot Points

It’s the cross-section of everyone’s favorite topics…healthcare and taxes! Trying to navigate the alphabet soup of employee health benefits can be a migraine-inducing task.

Healthcare insurance and expenses continue to rise. An HRA, FSA, and HSA can be a great way to help offset some of the increases. The aforementioned accounts can help you pay for qualified healthcare expenses, like deductibles, copays, coinsurance, and prescription costs, while saving on taxes at the same time.

Here are some important differences you should consider when determining which account is the best fit for your needs:

Type of Tax-Advantaged AccountHealth Reimbursement Arrangement (HRA)Flexible Spending Account (FSA)Health Savings Account (HSA)
Who funds it?Employer-onlyEmployer or EmployeeEmployer or Employee
Who is eligible to use?Only offered in conjunction with employer-provided health plansOnly offered in conjunction with employer-provided health plansMust have a high deductible health plan (HDHP)
How much can you contribute each year?None; 100% employer-funded$2,650Individual: $3,500, Family: $7,000
How much can be rolled over each year?Allowed at employer’s discretionAllowed at employer’s discretion; $500/year maximumFull rollover allowed
Can it be transferred from one employer to another?Portable at employer’s discretionNoFull portability allowed
How is it taxed?Contributions not included in income; tax-free reimbursements for medical expensesContributions not included in income; tax-free reimbursements for medical expensesContributions not included in income; tax-free reimbursements for medical expenses
What can it be used for?Medical, dental, vision, and prescription expenses.Medical, dental, vision, and prescription expenses.Medical, dental, vision, and prescription expenses. COBRA, retiree medical insurance premiums, long-term care premiums/expenses.

Choosing which account or accounts to contribute to and how much to contribute will vary from person-to-person. A good rule of thumb as you begin thinking about these accounts and how much to contribute is to determine how much would be needed to cover your deductible, expected medication costs, anticipated doctor’s visits, etc.

Consider using an online calculator to help start the conversation. Also, don’t be afraid to ask your HR representative as you come across questions or work with your financial planner to help determine the best plan of action for you and your family.

Dependent Care FSA’s

Dependent Care FSA’s

Employee Benefits

by | Sep 28, 2018 | Employee Benefits, Teachers, Weekend Pivot Points

Dependent Care Flexible Spending Accounts are one of my favorite, yet lesser-known employee-benefit options. Child/Dependent care is expensive and a DCFSA can help ease some of the stress on the budget. It can be a great tool for young families, like my own, who will have a significant amount of daycare expenses in a given year.

So…what is it, how does it work, and why should you consider it:

What is a Dependent Care FSA?

It’s a voluntary employee benefit option allowed by some (but not all) employers to help you save money on your family’s child care expenses.

How does it work?

By saving from your paycheck into a Dependent Care FSA, you use pre-tax dollars to pay dependent care expenses. This allows you to shelter a portion of your child care expenses from Federal and State income taxation, and, in many cases, Social Security and Medicare taxation also. This helps to reduce your taxable income and, in turn, may reduce the overall amount of taxes you pay.

Benefits of enrolling?

Tax savings is the main reason for using a Dependent Care FSA. As an example, if you contributed the household maximum of $5,000 in a year and fall into the average household tax bracket (22% Federal, 5% State) for most Kentucky families, you might expect to save roughly $1,350 a year in Federal & State taxes alone and up to $1,732 if you include the Social Security and Medicare tax.
Drawbacks of enrolling?

Dependent Care FSA’s are “use-it-or-lose-it” accounts. The money you contribute each year cannot be rolled over into the next year. Families must be careful not to contribute more than they expect to pay in child care expenses for that given year.

Families must also be careful to keep good records/receipts of their child care expenses and also ensure that their child care expenses meet the qualifications for reimbursement (i.e. child care provided by someone outside of your family, etc.).

What you should consider before enrolling?

The first question to ask yourself is “will I be paying child care/dependent care expenses next year?”. If the answer is “yes”, it becomes important to start estimating how much you expect to spend in that year so that you prevent over-contributing to the account.

The final and more difficult question to consider is “will it be more beneficial to save into a Dependent Care FSA or take the Child Care Tax Credit?“. Unfortunately, that answer is beyond the scope of this post. While tax saving is important, it’s also important to consider how this decision fits into your overall financial plan. The decision to enroll or not enroll in a Dependent Care FSA should ultimately be made on an individual basis with the help of your CPA and/or financial planner. At the very least though, it should be part of the conversation.