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Getting More For Your Money With Pre-Tax Dollars

 

Your Initial Financial Plan:


Looking For a CPA, Lawyer or Financial Advisor who has worked with lots of other newlyweds and is familiar with the issues that affect you?  

Trying to get more for your money has become an American pastime.  Retailers are always having sales, the auto industry is continually offering different incentives, and restaurants come up with new promotions all the time.  Over the years, consumers have embraced these discounts and have become accustomed to paying less than full price whenever possible.

Besides paying discounted prices, another way to get more for your money is by purchasing goods and services with "pre-tax dollars" versus "after-tax dollars".  Remember, because of income taxes, $100 of pre-tax dollars is equivalent to approximately $166 of post-tax dollars.

The Cafeteria Plan

One place to find a variety of pre-tax opportunities is your benefits package at work.  These days, most employers offer benefits to their employees through a "cafeteria plan", which allow you to select your benefits, such as medical and dental insurance, from the options provided through the plan, and pay for only those benefits that you select. 

As a participant in a cafeteria plan, your employer will provide you with an allowance to purchase your benefits through the plan.  If your allowance exceeds the cost of the benefits selected, the excess will be included in your paycheck as taxable wages.  If the cost of the benefits you select exceeds the allowance, you will pay for the shortfall with pre-tax dollars.

Flexible Spending Accounts

As part of your benefits package, you probably have the option to set aside a portion of your salary, pre-tax, into your flexible spending account.  Most plans allow their employees to designate up to $2,000 per year for out-of-pocket medical and dental expenses, and up to $5,000 per year for dependent care expenses.  By taking advantage of your flexible spending account, you'll be able to pay for certain personal expenses with pre-tax dollars, thus getting more for your money.

One downside to flexible spending accounts is that if you don't "use it, you lose it".  In other words, if you set aside money in your flexible spending account, but don't have enough expenses to cover the amount you set aside, the excess will not be paid out to you.  Instead, any money remaining in your flexible spending account at the end of the year will be lost.

Annual Benefits Review

Most employers allow you to change certain benefits only once a year (usually in the fall), so that's usually a good time to contact the benefits department to review your options.  During your review, ask about the different pre-tax opportunities available through your employer's benefit plan.  Only by planning ahead will you be able to maximize your personal expenses that are paid with pre-tax dollars.

 

 

 

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This article was written by Andrew D. Schwartz, CPA for YourWriters.com and had previously been posted on Collegexit.com.