| Give yourself a raise! Stretch your
paycheck |
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Health-care flexible spending accounts
allow an employee to set aside pretax dollars to pay for medical
costs not covered by insurance. The money may be used to pay for
expenses such as prescription drugs, alternative therapies, chiropractic
treatments, contact lenses, smoking cessation programs, orthodontic
expenses and eyeglasses. In September, the IRS approved paying for
over-the-counter drugs with flexible spending account money. The
list of approved items is extensive, so contact your employer for
an up-to-date itemization.
This is how these accounts work: You decide on the
amount you want to set aside for health-care costs for the following
year. Each pay period a portion of that amount is deducted from
your paycheck. If you designate $2,400 for a health-care flexible
spending account, $200 will be deducted each month, before taxes.
At Texas Children's Hospital in Houston, 30 percent
of the hospital's 6,000 employees participate in flexible spending
account programs. Arlene Hillegeist, director of human resources
services, says that many more employees could benefit from these
accounts, but they either don't know the options exist or are wary
about putting money into them.
One reason for the hesitation is the "use it
or lose it" rule under which these accounts operate. Until
recently, the money in a person's FSA accounts had to be spent during
the 12 month period. In May, the Internal Revenue Service loosened
the use-it-or-lose-it constraint by announcing that it will allow
spending plan participants to make claims against their accounts
for up to two months and 15 days after the end of their benefit
year. Any money left in the account after that is lost. But if you
plan conservatively and carefully, you can avoid this loss.
Health-care flexible spending accounts operate on
an individual basis, so you and your spouse may each contribute
to your own accounts. Your employer determines the maximum contribution.
Dependent-care flexible spending accounts operate
on a per-household basis -- up to a $5,000 per year maximum.
While companies are powerless against the limits the
IRS has set on some of the flexible spending accounts, they can
be creative with other pretax benefits such as transportation reimbursement.
Tax benefits for traveling to
work
According to the IRS, transportation reimbursement of up to
$190 per month for parking and up to $100 per month for mass transportation
and van pools may be made available to employees. You must work
for a company that has such a plan in place to have these costs
deducted from your paycheck before taxes.
Texas Children's offers several tax-saving commuter
options for its employees, who can deduct a $50 monthly parking
fee from their paycheck. Van pooling and bus passes can save employees
as much as $2,000 a year in commuting costs.
To find out which of these and other money-saving
programs your company offers, contact your human resources department.
Retirement
Retirement plans are another great way to stretch your paycheck.
Your contributions are made with pretax dollars. You're saving for
the future while reducing today's taxable income.
With 401(k) plans, employees can contribute a portion
of their salary to a company-sponsored plan. Many employers will
match a certain percentage of this contribution, in essence offering
"free money" to those who invest in the plan.
While it is difficult to argue against socking away
money for those golden days, it is also important not to get too
carried away with unrealistic visions of leaving the workforce at
age 40.
"If you're putting too much away in a 401(k)
or savings account, and you don't have enough to live on, and you're
using credit cards all the time, that is defeating the purpose,"
Lawrence explains. "If at the end of the month, you are pulling
money out of savings, you end up saying to yourself, 'I'm not a
very good saver.' There's a kind of psychological erosion."
Mapping out monthly and yearly expenses using tools
such as "The Budget Kit" can help you predict the cost
of incidentals and determine how much money to put into flexible
spending accounts and retirement plans.
Direct deposit
One of the most basic benefits an employee can use is direct
deposit. With this feature, your employer deposits your paycheck
directly in your account each pay period. Not only is it easy, it
makes other automatic payments simpler. Plus with automatic deposit,
there is generally no hold on the funds.
For example, if a $3,000 paycheck is added to your
account on the first of every month, you might also set up your
$250 car payment to be automatically deducted each month. This saves
time and eliminates the chance that you may forget to pay the bill
and incur a late fee or finance charge.
Regardless of whether you contribute $10 each month
to a 401(k) or $100 to a savings account, plan out how best to allocate
your paycheck -- and then stick to the plan. You may find that some
luxuries will become more affordable than you had imagined.
Christie Taylor is a freelance writer
based in Houston.
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