April 2021 - Benefit Details Every Young Professional Should Know: 5 Questions with Pat Torney
Many employers offer the option of a Traditional or Roth 401K. What is the difference of these plans and the benefits of going with one over the other?
The main difference between these accounts is when you pay taxes. With a Traditional 401(k) you skip taxes now, so 100% of the money goes into the retirement account. When you take money out from the Traditional 401(k) in retirement, you pay ordinary income taxes at that time. On the other hand, with the Roth 401(k) you pay taxes today and pay no taxes when you withdraw money in retirement. When considering your options, you have to think of where you are in the tax bracket today and where you think you will be in retirement, which is challenging. Generally, when you are younger and in lower tax brackets you should be taking advantage of the Roth. In high tax brackets you should be taking advantage of the Traditional plan
How does an employer match work and does that have an impact on how much I should be contributing?
An employer match is basically a bonus from your employer in your 401(k). If an employer offers a match of say 3%, it means if you contribute 3% of your pay, they will match that 3% and you receive a total of 6% into the 401(k) plan. As a rule of thumb, you should AT LEAST be contributing what the employer will match. If you do not, you are leaving free money from your employer on the table.
What are the differences between a Health Savings Account and Flexible Spending Account and what are the benefits of contributing to one of these accounts?
These are plans that allow you to take pre-tax money and set it aside for medical costs. Depending on your tax bracket, this could be a 20-40% boost on that money. Not all health insurance plans will offer an HSA or FSA. The HSA plan is offered for those who have a high deductible plan. The money you defer in your HSA can be used to cover qualified expenses of care before you meet your deductible and additional expenses. In addition, you have the ability to carry over money from year to year. The FSA does not require a high deductible plan, but unlike the HAS, you are not eligible to carry the full amount over from year to year and must spend it. Because of the tax advantage nature of these plans, you should be taking advantage of them at least to the extent of your normal yearly medical costs.
Generally, what should I be considering when looking at my group health and disability benefits?
Health insurance should be a big consideration when looking at job offers. As a young single person this might not be as big of a concern, but as you get married and start a family, the plan and costs should be carefully examined. The best health plans are going to offer the broadest coverage with the lowest deductibles. On a family plan, those deductibles can add up! A good portion of employers offer disability coverage for 60% of your pay and they cover the costs. Since they pay for the coverage, if you need to use the disability insurance, the 60% will be taxed as income. Often, this is not enough to continue supporting your lifestyle and should be reviewed to see if you need a personal policy.
With a fixed level of discretionary saving, should I invest now or pay down debt?
The first thing you should do is make sure your debt is on a payment schedule with an end date. This is not an exact science because everyone feels differently about carrying debt. However, if you have high interest debt such as credit cards, you should be looking to pay that off ASAP. If you have debt that is only 3% or 4% to carry, you might not be as interested in paying that off right away and rather leave it to the amortization schedule. I think the best solution is to pay off high interest debt right away and once that is complete, be looking to split your savings between investing and debt repayment.