by Hope
Or rather taxes, insurance and decisions, oh my! I have decided to move forward in with the new job offer and return to the corporate world. I have spent hours upon hours looking at it from every angle, wanting to make a wise decision for the long term.
My research has included direct conversations with my current contract employer and soon to be corporate job employer. I have mandated getting things in writing. And I have scoured the internet for reviews on this company and financial implications of this new financial arrangement.
Your encouragement on my last post was truly appreciated but even moreso, the suggestions…like what about a “work from home” stipend and so on. As of last night, they are moving forward on beginning the processes and the paperwork. We agreed on a transition period for me to complete existing projects or give existing clients time to find a replacement. But I will not send out notice until I have a deal in hand.
New Tax Bracket
It’s been a very new feeling for me to be so “woo’d” by a company. Working for them on a contract basis for last almost 5 months has given both me and them a very good view of each other. Needless to say they have been pleased and I really enjoy the work, the autonomy and the team I will be working with (same one I am working with now.) From the upper management to the people on my team, they have all expressed a desire to have me stay past our initial December end date. And that it’s really going to happen is, well, really flattering.
We did a brief but mostly, straightforward salary negotiation. I knew the salary range of others they were interviewing, but knew my skill set and experience was far advanced. I made a request higher than I expected and then we ended up at what I had in my mind as my bottom line.
The financial implications are more than my brain can handle right now…we are definitely moving to a new tax bracket. And all I can focus on is staying wise in my decisions, not inflating our lifestyle and PAYING OFF DEBT.
Transition Plan
I’m really grateful for the delay in the change…it’s going to give me time to wrap my head around everything, make wise tax decisions and have a solid plan before I get my first paycheck.
The plan now is that I will go part time with them beginning January 1, at my new salary but on an hourly basis. Once I am confident my clients are taken care of and then I will transition to full time. It truly is the best of both worlds and they have been very understanding of my desire to be fair to all my existing clients. I do not want to leave them hanging right at the new year.
I’ve got a lot more research to do on tax with-holdings, retirement savings and so on. And what do with my newly formed ROTH IRA. Can I have both a traditional 401K and a ROTH IRA. Can I contribute to them both? What is my max contribution? So many questions and frankly the resources I am finding via Google searches are not written for dummies. I need dummy proof advice. My thought is that I may need to consult an accountant to make sure I make wise and correct decisions.
Hope is a creative, solutions-focused business manager helping clients grow their business and work more efficiently by leveraging expertise in project management, digital marketing, & tech solutions. She’s recently become an empty nester as her 5 foster/adoptive kids have spread their wings. She lives with her 5 dogs in a small town in NE Georgia and prefers the mountains to the beaches any day. She struggles with the travel bug and is doing her best to help each of her kids as their finish schooling and become independent (but it’s hard!) She has run her own consulting company for almost twenty years! Hope began sharing her journey with the BAD community in the Spring of 2015 and feels like she has finally in a place to really focus on making wise financial decisions.
Good for you! Congratulations.
I think you’ve hit the nail on the head by stating that you don’t need to inflate your lifestyle to match your income. Live like you are now and pay off that debt! Then you can do whatever you want, for real.
I good resource for the retirement stuff is The Simple Dollar. Trent has answered questions about retirement and I’m sure has dealt with whether you can have both traditional and Roth IRA’s. It’s a solid website that should provide a good amount of information. And it’s written so that anyone can understand it.
Thank you, I will check The Simple Dollar out for sure!
Congrats! You do not need an accountant. W2 work is dead simple compared to doing business taxes. I would recommend setting up a lot of savings automatically from the beginning. It will jumpstart your retirement savings and you won’t even miss it. You can have both an IRA and a 401k so don’t change a thing yet!
I’m a little concerned about you closing down all your clients. It may be nice to keep a few on for side hustles, and the ability to deduct a bunch of WFH stuff. I hope the new company isn’t have you sign a non-compete or something.
Yes you can have both and contribute to both.
Your contribution limit on the 401k is 19,500, 6,000 on the Roth if you’re under 50 years old.
If you have a traditional 401k, those contributions are pre-tax, so you’ll end up paying taxes on them later. Roth contributions are post-tax, so you shouldn’t be paying income tax on them when you withdraw them. There is a Roth 401(k), where your contributions are post tax. I don’t know much about them or how common they are, so I’d ask your new employer if they offer that.
For retirement, the most important thing you can do is max out your employer match on the 401k. So if they match up to 5% of your salary, make sure you put your 5% in the 401k. After that, max out your Roth. Beyond that, you probably need to talk to a financial advisor, one that is a fiduciary, about your specific situation.
Think of the 401k matching as salary that you just aren’t receiving yet. The purpose of matching is to incentivize you to save for retirement—they’re basically paying you to save. So don’t leave that money on the table.
So to confirm, I can contribute $19,500 pre-tax to the corporate plan and keep my ROTH IRA and contribute $6000 after tax?
Yes you can contribute to both an IRA and a 401k. You can also contribute to a Roth IRA up until April the next year. So you should be looking to contribute the 6k max to your 2020 IRA by April 2021 next year if its in your budget! If your plan as “After Tax” 401k, you can contribute up to 53k. But this is pretty rare.
Generally, this is the best way to plan your extra money (in priority order).
1. Fully fund Emergency Fund (sounds like you’ve got this covered)
2. Contribute to 401k to obtain the maximum company match (typically anywhere between 3-8%)
3. Max out HSA if in HDHP plan. 7200/year (No Fed tax, or FICA/SS taxes)
4. Max out IRA (Roth or traditional) 6k/year
5. Pay off high interest (you have none).
6. Contribute to 401k maximum – 19500/year
7. Pay down any low interest debts (your car and student loan)
I love this…so helpful!
Working on numbers and plans now, this was exactly the guidance I needed.
However, as I’m doing math and looking at benefits…
It looks like if I max everything out, like I am planning to, it cuts my take home pay (salary) almost in half…almost 50% of take home pay would go to pre-tax stuff – retirement – max to contribute $19,500, HSA – max to contribute $7,200, insurance premiums – health, vision and dental. Does that sound right? Is that good?
It still gives me plenty to live on, pay off debt, etc.
Follow up question – any reason to have both HSA and FSA? I know the FSA has a use it or lose it type clause and the HSA stays. Is there any reason or is it allowed to have both? Would obviously use FSA before HSA. Anticipating some oral surgery for at least 1, maybe 2 of the kids so just trying to be smart.
Then contributing to my existing ROTH IRA post tax…after it hits my bank.
Sorry, I’ve pointed you in the right direction. But you’ve got to do some more research and calculations for yourself. There are TONS of resources online and the questions you’re asking are all simple answers. For example, you can’t have an HSA and an FSA. What is available to you is dependent on your health plan. Contact your HR rep to start going through the differences in health plans available and really think about your needs as a family to make the right decision.
Also, Salary =/= Take Home Pay! You will need a tax withholdings calculator (or a good homemade spreadsheet) to help you calculate what your take home will be with different deductions and withholdings.
If you’re getting health insurance, are you thinking about putting the twins on? They should be eligible to be covered until they’re 26 (I think). Usually the additional costs for health plans are for “family/dependents” and doesn’t change with how many kids you have. Yours might be different though.
If you can’t afford to max out both your 401k and Roth contributions (and saving 50% is probably unrealistic), focus on getting to your employers maximum match rate. Then max out your Roth. Then if you comfortably have money leftover, look at upping the 401k contribution. By “comfortably have money leftover”, I mean that you are not only able to pay your bills, but you still have enough to save/cover emergencies and unexpected expenses, and have a lifestyle you can sustain without feeling deprived constantly.
And I think it is going to be best to go talk with a financial advisor about your best strategy saving for retirement. You need someone with a complete picture of your finances to tell you your options for catching up.
Congratulations. This is something wonderful, and amazing for your future.
Congratulations! I personally think that you should consider finding a financial advisor so you can lay out what your goals are for yourself and then can get you started on planning for the present and the future with your new salary.
As far as FSA and HSA, I don’t believe you can have both. HSAs are for high deductible health plans and FSAs are generally what you get when you don’t have a high deductible plan(we don’t we have co pay plan and hubby’s company offers FSAs). Someone can jump in and correct me if I am wrong though.
I signed up for the HDHP and HSA for the upcoming year. If I had wanted to, I could have chosen a “limited purpose FSA” (or something to that effect). This type of FSA would have only been useable for dental or vision. I have no idea how common it is.
Congratulations Hope. As someone who has been tough on you on occasion, I am really happy to hear that you have created and are taking this opportunity.
I just wanted to point out that no one, including yourself, should worry about “moving into a new tax bracket”. The way our tax system works, it is almost impossible for that to be a bad thing overall. Remember, you only pay that rate on the additional income past the cut off for the previous bracket.
I also would bet anything your taxes will be way simpler than as an independent contractor. The exception would be the first transition year if you still have income from both sources. But going forward, it should be a one or two hour exercise, tops.
You cannot contribute to both an HSA and a FSA.
@Lisa I was going to say the same thing! Are we the same person, lol.
Congratulations on the job, Hope!
Roth IRAs have a limit on how much income you can earn before you can’t contribute. You should check the max. The is a backdoor way but it is complicated.
How much are they matching the 401k? You should not max out the 401k. You need to pay off your debt first.
I highly doubt Hope will be anywhere near the phaseout limit of a Roth IRA. The start of the phaseout is 125k AGI. So unless she’s making 150k or so with no pre-tax deductions it isn’t something to worry about. If she is in the phaseout range, this makes contributions to HSA and 401k even more valuable.
401k saves federal taxes which I’m guessing is 22% or so (the top dollars of the salary). Therefore, contributing to her 401k has an instant return of 20%, while her debt is 3% and under. If your priority is to catch up, you’d put the money in a 401k. Contributing to a 401k in turn reduces your AGI, which may open up other tax savings or credits.
Also, Biden has big talks of cancelling up to 10k of student loan debt. I would pause any aggressive debt payments and put them in savings or retirement in case he is able to follow through in the next 6 months. I’ll admit it is very up in the air right now.
Considering that Hope owes a lot more than $10K, I don’t see why potential loan cancellation should affect her plans.
The conversations have included talks of up to $50,000, and she only has around $20,000 left of student debt if she managed to pay off that first loan.this month like she planned. She does have a car loan too though.
I actually hope Hope talks to someone who can help her learn some balance when it comes to money. In order to navigate money successfully you have to balance saving and spending. She can pay down debt and save for retirement and in actuality should be doing both.
I think its a good idea for you to quit paying on your student loan debt. Biden will forgive it up to $50,000. Why should you pay for it when other hard working taxpayers can pay it for you? You’ve been put of school for a long time and have funded numerous trips when you could’ve personally paid for your own student loans. Your welcome from someone who went to college and paid all of my own student loans. I work hard to pay yours too.
Congrats on the new job! Personally if you are moving up a lot in income, I would consult an accountant willing to teach you what you should be doing going forward, and also one that values paying off your debt. I find that investing sometimes takes a priority over debt payoff and nothing is freer than paying off your debt. To start, don’t go overboard with anything. If you new income would allow you to pay off your debts rather quickly, do that and then go gangbusters on the IRA. Maybe contribute something to get it started, but wait until you’ve tried out the new job a bit before jumping all in. Usually you can change your contributions throughout the year. Paying off your debt is never going to be a bad thing (as long as you aren’t accumulating more) and you’ll always be ahead of the game. I would pour everything into debt payoff and then pour everything into retirement. More gain that way IMO. I know, I know, you will miss a year of investing possibly, but you’ll have that much more to invest going forward if you don’t have debt payments.
Your goal has always been debt payoff. That is what hangs over our heads. Maybe make it a game for a few months to see how much you can pay off. Once you’ve paid it off, you will be so free to do investing and other things. One trick I’ve done is have a portion of my paycheck deposited into a separate account. That way I don’t “see” it in my check per se and then I can use it to pay off things right away. Just something to think about.