Heading into the last quarter of 2023, October is the perfect time of year to review your year-to-date paystubs in order to maximize pre-tax benefits and other withholding items. Examining your year-to-date paystub early in the final quarter of the year gives you a chance to make any needed adjustments before the opportunity passes by if you wait until the end of December.
Here are a few good questions to ask to see if you should make changes:
Are you on target to fund the maximum allowed 401k or 403b salary deferral amount?
For 2023 the maximum salary deferral is $22,500. Plus, if you are age 50 or older you are eligible to fund an additional “catch-up” amount of $7,500 making your total allowed contribution for 2023 $30,000. Turning age 50 at any time within the year allows you to fund the “catch up” provision as early as January 1 of the current year. You don’t need to wait until the actual day of turning 50 to begin funding the additional $7,500.
Did you switch jobs or work multiple jobs during the year and fund a 403b or 401k at each place of employment within this calendar year?
The 401k/403b max salary deferral is the total allowed salary deferral for employees from all places of employment during the calendar year. You are not allowed to fund the $22,500 ($30,000 including catch-up) maximum salary deferral limit at each separate place of employment.
Does your employer offer a pre-tax childcare and/or health Flexible Spending Account (FSA)?
Don’t forget, FSAs offered by your employer are “use it or lose it”. If you are funding an FSA for childcare or health care expenses, check your remaining balance available to be sure that the funds are fully used by year-end. Unless your employer has a rollover or a grace period feature, your unused funds at year end are forfeited back to the employer and not eligible to be carried over into the following year. However, if your employer has implemented the rollover option for your health FSA, then you can carryover up to $610 of unused funds from 2023 to 2024. Or, if your employer has implemented the grace period option (applicable to both dependent care and health FSAs), then the December 31 cutoff date is allowed to be extended until March 15 of the following year to use up remaining unused funds still available at the end of the year. For a health FSA, the max contribution limit for 2023 is $3,050 per individual. For a dependent care FSA, the max contribution limit for 2023 is $5,000 per household ($2,500 if married filing separately).
Are you taking advantage of a Health Savings Account (HSA), if offered by your employer?
If your health insurance plan is a “high deductible health plan” you are allowed to fund an HSA. Funding is made with pre-tax dollars. For 2023, the max contribution limits are $3,850 for self-only coverage and $7,750 for family coverage. If you are age 55 or older at the end of the year, then you can also fund an additional $1,000 into your plan. Plus, if your spouse is age 55 or older, he/she can establish a separate HSA and fund an additional $1,000 catch-up contribution into that account making your total family HSA contributions for 2023 $9,750. The major difference between the health FSA and an HSA is that the health FSA is “use it or lose it” at year-end while the HSA works more like an IRA where the unused funds remain in the HSA continuing to grow tax-free and available to be used for qualified medical expenses in future years.
Did you receive a large bonus or have some other significant compensation payout during the year?
The “federal supplemental withholding tax rate” is 22% on special compensation payments to employees. Typically for bonuses and other special compensation payments paid to you by your employer, federal taxes withheld from the payment are 22% of those taxable wages. If you are in a higher federal tax bracket than 22% (which is often the case), then federal taxes withheld will be too low and you may find yourself owing taxes next April. And if you are in a 35% or 37% federal tax bracket and the payout is significant, then your federal tax balance owed the following April tax filing date could be significant as well. A good idea would be to track down any paystubs reflecting special compensation amounts to see how federal taxes were withheld.