What you don't know about your employee benefits could be costing you $100,000 or more. We discuss the important of employee benefits with Natalie Pine. She tells us how some obscure parts of the tax code can save you a lot of money in taxes and why if you don't talk to your employer about a "total compensation statement", you could be leaving a lot of money on the table. Do you have a total compensation statement for your job?
The Importance of Employee Benefits
I hope you enjoyed my interview on Money Tree Investing podcast about something that is a daily part of our planning at Briaud Financial Advisors: The importance of employee benefits and how they can improve your financial standing.
Employee benefits significantly impact our client base made up largely of university professors (our town is home to Texas A & M University) who have excellent benefits. Sometimes it is easy to gloss over the importance of employee benefits and not pay much attention to them because we do not see a tangible connection to our paychecks or automatic deposit slips.
In reality, benefits are worth thousands of dollars annually, and it would be beneficial to examine them in order to see how they can benefit your retirement and other financial goals, especially as many of them can help you save taxes. Here are some points I raised about the importance of employee benefits that might help you evaluate what you are receiving and how it impacts your financial health:
- Get a full understanding of your benefits
- Consider the importance of employee benefits before making a job move
- Avoid (or defer) taxes in order to save more for retirement
- Create a total compensation statement
- Strategies to consider as an entrepreneur or small business
Get a full understanding of your benefits
As mentioned, you may have some hidden gems accessible with a little bit of research. At some public universities in Texas for example, professors can earn free health care for life after teaching 10 years. With health care costs skyrocketing all the time, how much is that benefit worth to you?
While free health insurance is a big deal, there are also other benefits that might fall under the radar. For instance, at Texas A&M, if you and your covered spouse take a wellness exam, then each of you will save $30 a month on health insurance for a total of $720 a year. That’s money that can help eliminate debt or be invested for the future.
And, let us not forget about employers who match 401(k) or 403(b) contributions. This is real money that will be in your retirement account when you are fully vested.
One additional point to make for those working for a public company with publicly traded stock is pay attention to what you have in your 401(k) before you sell any of it. You should be eligible for Net Unrealized Appreciation (NUA) treatment on that stock. This means your company stock can be distributed for cost basis when you retire, and then sold for capital gains on the difference between cost basis and current price.
Example: If you bought 100 shares of Exxon at $10 a share, and they are now at $70 a share, you can distribute the 100 shares in your 401k and pay $1,000 of ordinary income. If you sell at $70 a share in the future, you then pay $6,000 of capital gains. Keep in mind that holding on to stock in the same company that employs you can be risky and may not be advised.
Consider the importance of employee benefits before making a job move
If you are in a position where you might be able to lock in stellar benefits in just a few years, then you will want to carefully weigh what happens if you were to leave for another job. You might make some more money on the front end, but over time is it worth it? How much more can you invest for retirement if you do not have to pay for health insurance?
I realize there might be quality of life concerns or other compelling reasons to move; however, all things being equal, pay attention to the benefits package. It would be wise to understand how much these employee benefits are adding to your bottom line. For many of the professors benefits are a significant part of the total package. Please do not overlook them.
Also consider how far away you might be from being fully vested in your retirement plan or that free health care for life. In Texas, professors need to be in the Teachers Retirement System for five years in order to qualify for a pension. The longer they (and their institution) contribute into the system, the greater the benefit.
As you evaluate the overall importance of employee benefits, ask yourself whether this position is a long-term one or if you are just here for the short haul. If the position you are in is just a landing spot to gain more experience, then you might not want to factor the long-term benefits into the grand scheme of things.
Pay less taxes today in order to save more for retirement
IRAs, 403(b)s, 401(k)s, or 457s allow you to save for retirement with pre-tax dollars. These are considered tax-deferred accounts because taxes on the money are paid when it is withdrawn. Professors who earn a decent consulting income have a lot of options, including a SEP IRA, that allow them to take advantage of deferring taxes on potentially all of that consulting income. Another great option is making Roth IRA, Roth 403(b), or Roth 401(k) contributions. These contributions are made with after-tax dollars, so they are not taxed when money is taken out.
Both tax-deferred and Roth contributions play a role. With proper planning, you can make Roth contributions when you are young and in a low tax bracket, and then defer taxes when you are older, wiser and making a higher income.
Another topic we like to discuss is supercharging your retirement income. If you work a job where you receive bonuses or significant raises, then consider putting that extra money into retirement savings ... you will defer taxes, and you will have more money invested that has the potential to earn greater interest income. In addition, you will need less in retirement as your spending will not increase the amount you need for spending later on.
Create a total compensation statement
It would be nice if more employers put together a total compensation statement that includes wages and benefits. Some companies are paying $10,000-$15,000 a year just on health care premiums per employee. For someone making $50,000 a year, $15,000 for health insurance premiums amounts to an additional 30 percent of total compensation. Those who are self-employed, are paying every cent of their premiums so this is a huge benefit. How about getting paid while on vacation. This seems like such standard fare these days, but the self-employed do not get paid if they do not work.
Remember, the little things add up. Just one example is an organization that pays for meals, professional licenses and continuing education or other fringe benefits. These extra benefits can add up to $1,000s per year, and while these benefits aren’t paid directly to you, they help you avoid costs you would pay otherwise.
Strategies to consider as an entrepreneur or small business
Entrepreneurs, while they have a lot of freedom, do not have all the perks of someone who is employed at a university or publicly traded company. However, there are some options. They can open a solo 401(k) and contribute up to $19,000 a year tax-deferred. If they are over 50 years old, then they can put in an extra $6,000 to help them "catch up."
For small businesses, there is the new comparability plan that is designed to allow the owners or highly compensated employees to maximize their contributions, while the staff also receives a healthy contribution from the employer. We’ve seen this work well for physicians and their staffs. There is some mandatory testing to make sure the plan does not discriminate against the staff, so you may wish to work with an advisor and a tax professional.
I hope I was able to help you understand the importance of employee benefits a little better. They really do add up and contribute a lot to the financial stability of a household, even if you cannot see the true value on a paycheck or a direct deposit slip. If I can be of further assistance, please feel free to contact me through the Briaud Financial Advisors website.
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Today's Guest: Natalie Pine
Natalie joined Briaud Financial Advisors in 2007 as an Investment Analyst. After completing her CFP®, she expanded her role to that of Financial Advisor, including both financial planning and wealth management. Natalie became a partner in the firm in 2011.
Before joining Briaud Financial Advisors, Natalie worked for New York-based distressed debt hedge fund Davidson Kempner in London. When she joined in 2004, she was one of only three investment analysts in Europe working on analyzing struggling companies in all industries from automobiles to reinsurance. During her three years with the company, she monitored investment opportunities in the UK, Germany, France, Spain, Italy, and Switzerland. Before joining Davidson Kempner, Natalie spent two years with Goldman Sachs in London working in the Mergers and Acquisitions department analyzing companies and opportunities for these companies in the debt, equity or leveraged buyout markets.
Natalie has a Bachelor of Arts in Managerial Studies, Economics, and Electrical Engineering from Rice University.
Her personal interests include spending time with her husband Roger Pine and two sons, Ryland and Royce, as well as playing tennis and soccer. On occasion, you may even find Natalie at a CrossFit competition. In her younger years, Natalie was a national tennis player and played for the varsity team at Rice University.
Natalie's Online Presence: