Tag: Employee Benefits

Posted on by Jan Roberg

Checkpoint, How’s Your Withholding?

It's a good idea to just make sure that you are withholding enough tax from your paycheck.

It’s a good idea to just make sure that you are withholding enough tax from your paycheck.

 

I recently read an online forum where a fellow wanted to sue his employer for not properly withholding the man’s income taxes  from his wages.  While I felt sorry for the man and his looming tax debt, given some of the information he posted, I wasn’t convinced that the employer was at fault.  But the tax code and the forms are all pretty confusing, so how do you know that you are withholding correctly?  Fortunately, there is help.

 

First and foremost, if nothing has changed about your job or life situation and you’re happy with your refund/balance due situation, this isn’t for you.  If everything is fine, why change?  But–if you owed too much last April, or you had a job or lifestyle change, then you really should do a mid-year evaluation to make sure that your withholding is on track.  It’s a whole lot easier to change your withholding now than it is to make adjustments in December or after the year is already over.

 

What you need to do is have a copy of your latest pay stub and your last tax return handy.  You’ll need both to answer the questions in the calculator.  Then you’re going to click on the link to the IRS withholding calculator.

 

Now I’m going to be honest, the first time I looked at this I went, “Oh gee, who’d want to bother with this?”  But seriously, it’s the best program for figuring out where you stand with your taxes.  For most situations, I like it better than some of the fancy professional tax projection programs I’ve used.  Most importantly, you don’t need any special training to use it.  Just answer all the questions.  Sometimes you may have to guess, but do your best.  You really do need to have your latest pay stub and last tax return to do this though.  If you’re just estimating, it’s not going to be helpful.

 

The program will tell you, based on what’s actually been taken out of your check, how much your refund or balance due will be.  And, if you are expected to owe, it tells you how to change your withholding so as not have a balance due.

 

So let’s say you ran the program and it does recommend that you change your withholding.  What next?  That’s easy, take the information to your employer (or the payroll department) and fill out a new W4 form.  Unlike some other paperwork that can only be completed annually, you are allowed to change your W4 any time during the year.

 

So about that guy who wants to sue his employer?  I’ll leave that up to the courts.   As for me, I’d rather catch a problem before it gets out of hand, and the IRS withholding calculator lets me do that.

Posted on by Jan Roberg

How Much Should I Put into my 401(k)?

How much should I save with my 401(k)?

The more you save for retirement, the more you’ll have when you retire.

 

Updated June 10, 2016.

 

One question I hear all the time is, “How much should I put into my 401(k)?”   A good answer to that question is, “as much as you can.”  But how do you figure that out?

 

For 2016, the maximum amount that you can put into your 401(k) is $18,000, unless you’re 50 years old or over, then you can put $24,000 per year in.  If you can afford to put the maximum into your retirement plan, I recommend you do so.  I have never yet heard anyone complain of having too much money for their retirement.

 

But what if you can’t afford to put $18,000 into your retirement?  What if that’s all you make?  How do you determine how much to save?  As much as I always want to encourage people to put money into a retirement plan, if your financial situation is tight, and you might be forced to take that money out within the same year, don’t even put it in.  The very first thing you want to do is have a little cushion in a savings account.  If the car breaks down, or the roof needs a repair, you’ve got a little back up.

 

Let’s say your annual income is $30,000 a year and you have no savings whatsoever.  Make a goal of saving 10% of your income.  That’s 10% of $30,000, not 10% of your take home pay.  To do that, you’d need to save $60 per week to save $3,000 in one year.  (I gave you two weeks of vacation there.)  If you can’t live with that, adjust down a little until you find an amount that you can save regularly without hurting yourself.

 

Once you’ve got a little savings cushion, then you can start the retirement savings.  I always recommend that if your employer has a matching program, put in as much money as your employer will match.  For example:  let’s say your income is still $30,000 and your employer has a program where he’ll match what you put into your 401(k) up to 5% of your income.  If you put in $1,500, he’ll match it with $1,500.  That’s a 100% return on your investment.  If you put in $3,000, he’ll still only match with the $1,500.  If you can afford to save extra, that’s great, but the priority is the match.

 

Another consideration when deciding upon retirement contributions is reducing your income.  Suppose you’ll have a graduating senior in the spring.  401(k) contributions would lower the income reported on your tax return, which could impact your scholarship potential.  On the other hand, if you already have a child in college, education credits start phasing out at $80,000 ($160,000 if married filing jointly).   If you’re near a tripping point for a tax credit or deduction, it might make sense to increase your 401(k) contributions so that you can qualify for the credit.   Check with your tax professional to see what works best for you.