Take These Steps to Fully Utilize Your Year-End Benefits

As we approach the end of the year, it’s a crucial time for individuals to review and adjust their financial strategies, particularly in areas like 401(k) contributions, tax withholdings, and flexible spending accounts (FSAs). Let’s dive into these areas to ensure you’re on track for financial success.

Maximizing Your 401(k) Contributions

For those aiming to fully utilize their 401(k) plans in 2023, it’s important to know that the contribution limit is set at $22,500, with an additional catch-up contribution of $7,500 for individuals aged 50 and above. If you need to catch up to meet your contribution goal, consider adjusting your contributions now, as changes typically take one to two pay periods to become effective.

To avoid end-of-year scrambles, plan your contributions throughout the year. Tools provided by plan administrators like Fidelity and Vanguard can help calculate the right amount to contribute each pay period. Be cautious for high earners who max out early in the year, as this might lead to missing out on employer matching funds unless your employer offers true-up contributions.

If you’re contributing a lower percentage of your pay, like 6%, and aim to increase it, try incrementally adjusting it to 7% or 8% for a few months. This approach can help you smoothly transition to your desired contribution level.

Reanalyzing Tax Withholdings

Approximately 70% of taxpayers over-withhold their taxes, leading to refunds, while others might face unexpected tax bills. Use the IRS’s online tax withholding estimator to review your withholdings to avoid surprises. For those with non-withheld income sources, like gig work or rental income, consider making quarterly estimated tax payments to avoid owing a balance or incurring penalties.

Effectively Utilizing Your FSA

FSAs are a use-it-or-lose-it benefit, so spending any remaining balance on qualifying medical expenses is essential before the year’s end. The maximum rollover amount for 2023 is $610, depending on your employer’s plan. Remember, a wide range of over-the-counter products, including sunscreen and contact solutions, can be purchased with FSA funds. Additionally, if your employer offers reimbursements for certain expenses like gym memberships, ensure you submit your receipts within the deadline.

Other Benefits to Review

As the year draws to a close, it’s not just about 401(k) contributions, tax withholdings, and FSAs. There’s a whole spectrum of employer benefits that you can maximize for a financially healthier new year. Let’s expand our earlier discussion to include a comprehensive checklist of employer benefits you should consider.

Health Savings Account (HSA):

Health Savings Account (HSA): For those with high-deductible health plans, HSAs are a gem. They offer triple tax advantages: deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses. Maximize your HSA contributions to reap long-term financial benefits.

Employee Stock Purchase Plans (ESPP):

ESPPs allow you to buy company stock at a discount. If your employer offers this, it’s worth considering as part of your investment strategy, keeping in mind your risk tolerance and financial goals.

Education and Professional Development:

Many employers reimburse tuition or cover professional development costs. Before the year ends, explore opportunities for courses or certifications that can enhance your career.

Wellness Programs:

Take full advantage of any employer-sponsored wellness programs. These might include gym memberships, mental health resources, or other health and wellness benefits.

Vacation Time Utilization:

Check your vacation balance. Unused time might be forfeited at year’s end, so plan to use it or understand your employer’s rollover policy.

Life and Disability Insurance:

Review your coverage to ensure it meets your current needs, especially if you’ve had life changes this year.

Retirement Plan Review:

Beyond 401(k) contributions, assess your retirement plan for proper asset allocation and consider rebalancing if necessary.

Charitable Contributions:

If your employer matches charitable donations, amplify your impact by making contributions through this program.

Dependent Care Flexible Spending Accounts (DCFSA):

For those with dependents, a DCFSA can provide pre-tax benefits for eligible care expenses.

Bonus and Incentive Compensation:

Understand the criteria for year-end bonuses or incentives to ensure you’re on track to meet any necessary targets.

Case Study: Implementing End-of-Year Financial Strategies

Meet Sarah, a 45-year-old marketing manager earning $100,000 annually. She’s been contributing to her 401(k) but not maximizing it, has never adjusted her tax withholdings, and often forgets about her FSA balance.

Scenario Before Strategy Implementation:

401(k) Contributions: Sarah contributes 5% of her salary ($5,000/year) to her 401(k). The employer matches 50% of contributions up to 6% of her salary.

Tax Withholdings: She typically receives a large tax refund, indicating over-withholding.

FSA Utilization: Sarah has lost unused FSA funds in the past due to a lack of planning.

Strategy Implementation:

Maximizing 401(k) Contributions: Sarah increases her contribution to 6% ($6,000/year), fully leveraging the employer match. She plans to incrementally increase this by 1% annually.

Adjusting Tax Withholdings: Sarah adjusts her withholdings using the IRS’s online tax withholding estimator. This results in an additional $200 in her monthly paycheck.

Effectively Utilizing FSA: Sarah reviews her FSA and finds she has $500 unspent. She uses it for qualifying medical expenses, including new prescription glasses and a dental check-up.

Results After One Year:

401(k) Savings: With the increased contribution and full employer match, Sarah’s annual savings in her 401(k) rise to $7,500 (her $6,000 plus $1,500 employer match).

Tax Efficiency: The adjusted withholdings reduce her tax refund but increase her monthly budget, allowing her to manage cash flow better throughout the year.

FSA Benefits: Sarah fully utilizes her FSA, gaining maximum value from this benefit and avoiding unnecessary loss of funds.

Long-Term Impact

If Sarah maintains these strategies, her retirement savings will significantly grow due to higher contributions and compound interest.

Better tax planning leads to more efficient use of her income throughout the year.

Regular use of FSA funds for eligible expenses optimizes her benefits package.

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