It’s second nature to review your retirement account statements; but fewer give their paycheck the attention it deserves.
At RCS Financial Planning we know that the foundation of all good planning is cashflow. The very basics of how much money you have coming in, as compared to how much you have going out, is where planning begins. How much you are able to save for future goals is dictated by this cashflow. In this post we’ll share three things you should review on your latest paystub, and three action items you can take in the second half of the year to optimize enjoyment of your cashflow. I promise you can do this from the beach or pool!
Three Things to Review:
- Earnings. Does your pay reflect your understanding of your expected salary? If you’ve received a promotion or pay increase in the spring, does your current paycheck show your anticipated salary bump?
- Deductions. Are the payroll deductions on your paystub sensible to you? Do you know what all of those acronyms and abbreviated deductions are for? If not, send your stub our way and ask.
- Tax witholding. The IRS offers a helpful w4 calculator that w2 income earnners may find useful. For those of you with non-w2 taxable income sources, connect with an advisor to ensure your tax withholdings are on pace with your anticipated tax burdens.
Use our helpful paystub review guide to assess your paystub, or contact us for help
Bigger Paycheck?
Many of you may receive bigger paychecks in the later half of this year. As high income earners, you will likely cap out on your workplace benefit progams by the third quarter. Once these benefit plans have been maximized, you will experience larger deposits for the remainder of the year. Some of the reasons your net pay is larger are:
- Social Security Wage Caps: The 2023 wage cap for social security tax withholding is $160,200. Once your year-to-date earnnigs have hit this mark, you will notice that our social security tax withholding will be zero for the reaminder of the calendar year.
- 401k contribution limits: 2023 contribution limits are $22,500, or $30,000 if you are age 50+
- Health Flex Spending Account (FSA) allows employees to use up to $3,050 in 2023
- Health Savings Accounts permit 2023 savings up to $3,850 if you have eligible health coverage for yourself; or $7,750 if you have eligible coverage for your family. Plus an added $1,000 for Age 55+
- Dependent Care Flex Spending Account contribution limits. DCFSA allows you to set aside money from your paycheck pretax to pay for child day care and, in some cases, elder care. 2023 contribution limits are $5,000 for those Married, filing jointly.
Mindful Cashflow Planning
If you find yourself with more cash in your direct deposit than usual, how will you make the most of it? It’s easy for excess cashflow to be frittered away in unmemorable ways. While not every money decision has to be an objectively optimal one, I do encourage mindful action for this mid-year cashflow boon. Here are some suggestions:
- Contribute to any remaining eligible accounts i.e. Traditional IRA/Roth IRA as eligiblity permits. 2023 limits are $6,500 + $1,000 age 50+.
- Begin or increase after-tax savings and investing. Increasing the proportion of your after-tax savings/investing improves tax planning flexibility in retirement/distribution phase, particulalry if you desire an early/pre-59.5 retirement age.
- Spend it! Plan something that brings you joy. Use this extra cashflow for a trip or activity. Studies show that the anticipation of future activities delivers a great deal of happiness, often even more joy than the trip/activity itself. My family is planning a trip into the path of totality to view the April 2024 solar eclipse. My children are already having so much fun with the trip countdown. What’s your next joyous adventure?