Make the Most of Your Job Benefits
Open enrollment for several of your job benefits comes around only once a year -- typically in the fall. That means you may soon receive a packet of information from your employer asking you to select a health insurance plan for next year and other workplace programs in which you'd like to participate.
Granted, combing through your options can be painfully tedious, and you may feel confused or overwhelmed. But you're stuck with many of your choices for an entire year, so you want to make sure you are maximizing your benefits and making the best selections for your finances.
||Decoding Your Job Benefits|
||Save Now, Retire Rich With a 401(k)|
||Take Advantage of Tax-Deferred Accounts|
||Understand Your Insurance Options|
In my first job out of college, I'll admit I barely glanced at the package. I automatically chose the same health plan I'd had the year before and skipped over all the other benefit mumbo jumbo. After all, I was young and broke. There was nothing in there for me, right? I later learned that I was missing out on some pretty sweet perks, including free money. What could be better for someone who was young and broke?
So if you haven't given your job benefits much thought lately, now is the perfect time to take a fresh look. Re-evaluating your options could save you some serious cash.
STEP 1: Select health coverage that matches your needs
Getting health insurance through your employer may be one of the cheapest and easiest ways to get coverage because the company picks up part of the tab. (If your employer doesn't offer health insurance, learn how to buy your own policy.) But the choice you make could have a big impact on your health -- and the health of your finances -- over the next year.
When selecting your plan, find out if there are any deductibles that must be met before the plan starts covering costs. And once the deductible is met, what percentage of costs will the plan pay? Will you have any co-payments? What will it cost to see a doctor outside the plan? Is there a lifetime limit on what the plan will pay? Then, evaluate your health, family and financial situation.
Many employers offer workers an HMO or PPO option. If you're young and in good health, an HMO might be a good and inexpensive choice for you. With this plan, you pay a flat monthly fee, perhaps a small co-pay on each visit, but HMOs generally carry little or no deductible -- meaning, you don't have to rack up $1,000 in medical bills before insurance coverage kicks in. However, you can only choose a doctor who participates in the plan, or else you'll have to pay for the visit out of your own pocket. And if you ever want to see a specialist, you have to get permission from your primary care doctor. (Learn more about HMOs.)
If you have children or a medical condition that requires frequent trips to the doctor, a PPO might be the plan for you. These typically cost more than an HMO and may carry a deductible, but in return you get more flexibility in your choice of doctors.(Learn more about PPOs.)
With rising health costs, more employers are offering workers a high-deductible health plan coupled with a tax-free health savings account. If you're single and in good health, going this route to mainly handle coverage for major procedures could save you a bundle because you're allowed to stash enough cash before taxes are taken out to cover your deductible -- which must be at least $1,050 for singles or $2,100 for families. (Learn more about HSAs and if they are right for you.)
STEP 2: Join your company 401(k) or other retirement plan.
What if you could retire with a couple million dollars, your employer would give you money to make that happen, and you wouldn't even have to remember to make any deposits? Oh, and you'd have fewer taxes taken out of your paycheck each month.
Sound too good to be true? Well, let me introduce you to your 401(k), or its non-profit and public service cousins the 403(b) and 457. (For the most part, all of these "defined contribution" plans operate the same way, so for simplicity's sake I'll refer only to 401(k)s from here on.) A 401(k) is a savings plan that allows you to automatically invest part of your paycheck in mutual funds, bonds and company stock. Your choices will be limited to the specific investments your company offers through its plan, but you get to choose (up to specified limits) how much and where to put your money.
Your 401(k) contributions also come out of your paycheck before taxes are applied, reducing the amount of money Uncle Sam can tax. And 401(k) returns grow tax-deferred until you withdraw your money in retirement. Also, many employers offer a match on your contributions -- say, 50 cents for every dollar -- up to a certain percentage of your salary. Sweet! So what's the catch? Well in this case, you can't withdraw the money while you are employed before age 59frac12;. If you leave the company before age 55, withdrawals are taxed and generally hit with a 10% penalty, unless they're rolled over into an IRA or another employer's 401(k).
Retirement may seem like an eternity away, so why is participating in a 401(k) a big deal? Say a 23-year-old socks away $150 a month in a 401(k) earning an average 10% annually. By the time she turns 67, she'll have nearly $1.5 million saved. If her employer offers a 50-cent match for every dollar she contributes, her stash grows to more than $3 million. Use our calculator to see how quickly your contributions could add up.
STEP 3: Consider a flexible-spending account.
Your employer may offer flex plans that allow you to set aside pre-tax money to pay for routine expenses, including out-of-pocket medical costs, childcare or even commuting expenses. I always thought this benefit wasn't for me because it sounded complicated. (Confession: Anything that involved the word "tax" in its explanation used to give me a brain freeze.) But it turns out flex plans are easy to use and could save you money.
Consider this: For every $100 you don't stash in the account, you lose $25 if you're in the 25% tax bracket, whittling your spending power down to a mere $75. If you stash that $100 in a flex account, you keep the full $100 to spend on anything from a new pair of glasses to over-the-counter cold medicine.
If you have children and you pay someone to watch them, signing up for the child-care flex account is a no-brainer. Parents can contribute up to $5,000 each year to the account, which saves them $1,250 in taxes. And if your employer offers a commuter account, you'd do well to stash a little cash in there to cover your expenses. If you're going to spend $200 each month to park your car near work anyway, using pre-tax money to foot the bill would save you $50 a month -- or $600 each year -- if you're in the 25% tax bracket.
Whether young adults need to sock money away for medical costs is a little iffy. If you don't spend much -- if any -- money on health care each year (see the IRS's full list of qualifying expenses), you probably can take a pass because you lose any money you've saved in a flex account that you don't spend by either year-end or by March 15 the following year (your employer chooses which IRS deadline to use). Poof. Gone. So you don't want to participate unless you're absolutely sure you'll use all or most of the money. Take a good look at what your health and dental insurance plans cover. If you'll be required to pay for visits to your therapist, new contact lenses or teeth cleanings on your own, you might want to stash a little cash.