Demystifying new job paperwork

Theresa:
Hello and welcome to another episode of Wealth Planning Illuminated. I am your host, Theresa
Marx, a senior wealth strategist at CIBC Private Wealth in the us. I am joined today by my
colleague Amanda Regnier, also a senior wealth strategist at CIBC Private Wealth. In today’s
episode, Amanda and I will discuss new job paperwork with a focus on the tax and benefit
elections you may need to make when starting a job with a new employer. Okay, let’s get
started.
I recently had someone ask me about her new job paperwork. She’d been working with her prior
employer for a long time and was just a little overwhelmed by all the forms and decisions to
make. I thought it might be helpful to many people, whether just starting out in the workforce or
making a move for the first time in a while to walk through the various tax and benefit elections
that often come with starting a new job. Amanda, let’s start with everyone’s favorite topic, taxes.
Where should we start when thinking about taxes and starting a new job?
Amanda:
Well, you’re right. Taxes are my favorite topic, and if you’re listening to this, congratulations on
your new job if you have one. So the IRS has set up a form, surprise surprise called the W-4 to
capture your tax information. What’s interesting about the W-4 is you have a little bit of flexibility
in how you fill it out. It’s not strictly a right answer, wrong answer kind of form. So your
opportunity in the W-4 is to show your employer how much you want withheld from each of your
paychecks as you’re getting paid throughout the year. Of course, you must aim to withhold at
least enough to cover your tax liability. You can’t opt out of withholding, but in your W-4 you
have some flexibility to account, for example, your spouse’s income or income from another job
or any other additional withholding that you want to have done.
It walks you through the form and it gives you an opportunity to talk about other income that you
have, spouses income, second job, the size of your family dependence to calculate the amount
that you should have withheld, and you have a blank space where you also can opt to have
additional withholding done. So if you know that at your old job you were getting paid about the
same and last year at tax time you owed some money and you didn’t like how that felt, you can
use the additional withholding to withhold extra and aim to break even at tax time or get a
refund. There are wizards online that you can use to help you fill out your W-4. You can talk to
your accountant, you can talk to your advisors, but this is really your first opportunity to tell your
employer what your estimated tax obligations are going to be.
And they use that to automatically withhold the taxes from each of your paychecks so that when
you go to pay your taxes in the following April, you’ll have a statement from them called the W-2,
and one of the boxes is going to say, this is how much we’ve already withheld. You use that
when you’re preparing your taxes or your accountant uses that when preparing your taxes so
that you can see if you’ve already paid in to it enough or if you’ve got an outstanding
responsibility or if maybe you’ve paid so much that you’re going to get a refund back and then
you can decide that year. If you want to adjust your withholdings, maybe you got a really big
refund and you would’ve preferred to have that money in your paycheck week by week. You can
dial down your withholdings a little bit. So it’s really important first form that you will get from
your new employer.
Theresa:
So it sounds like if you fill it out for let’s say 2024 and we get to April, 2025 and it was like, oh, I
was a little bit off one way or the other, maybe I withheld too much or withheld too little, then you
can go back to your employer and say, okay, for this year I want to adjust that a little bit to right
size it. So if you don’t get it right the first time, it’s not the last time that you can look at that form.
Amanda:
That’s exactly right. And the IRS publishes their own estimator to help you navigate the W-4. It’s
called the tax withholding estimator. It’s on irs.gov. So it’s come a long way in helpfulness for
taxpayers to use to think about their tax withholding choices.
Theresa:
So Amanda, you said in New York, I said in Illinois, both of us pay state income taxes. So how
does the W-4 work for state income taxes?
Amanda:
You may get a state specific version of the W-4 to fill in to help you estimate your state
withholding responsibilities, and your employer has a responsibility to hold those taxes back as
well. So it’s in their interest to try to make sure you get it right. And then that’s another thing that
may factor into your federal income tax liability because there is a little bit of a deduction for
state taxes. So that’s something that after the first year, you may go ahead and adjust in terms
of your federal withholding because you can reflect that as a deduction.
Theresa:
Okay, makes sense. So when looking at maybe your first paycheck, you look at it and you see
the taxes come out, but there are other withholdings that sometimes we’ll see on a pay stub. So
can you talk to us a little bit about those as people are starting to think about their new job?
Amanda:
Sure, you’re right. I think you open up that envelope, you see your first pay stub, and then you
might say, Hey, who the heck is FICA and why are they getting my money? And that’s an
acronym for Federal Insurance Contributions Act. You might see some other acronyms like
OASDI, Medicare gets rolled into the FICA. These are all withholdings for social safety net
programs that are administered by the federal government. So OASDI is what’s commonly
known as social security. Every worker’s got an obligation to pay in. Your employer is paying in
as well. The good news on that one is it is capped at just under $10,000. So it’s supposed to be
6.2% of your wages, but the maximum manual contribution is $10,000. So depending on what
your pay rate is, you may get to a point in your paycheck year where that falls off, that deduction
falls off and your pay gets boosted a little bit right in time for the holidays usually to do some of
your shopping. So that’s something that will definitely be on your statement. You might see
things like if your state requires that you have disability insurance or family leave insurance, you
may see some line items for that that you either must pay into or that you may opt into and
those will come out as well. Not usually a ton of flexibility in those. They kind of are what they
are.
Theresa:
So kind of almost like a defined amount that’s going to come out of each paycheck, unlike the
income taxes where you can choose how much is being withheld, these are, as you said, what
they are. Alright, let’s switch gears a little bit from what we’re paying out to maybe what we’re
getting from a new employer. So thinking about benefits, and I think the first one that often
comes to people’s minds when they’re thinking about an benefit from an employer is a
retirement savings plan. So you think about a 401k or a 403b or a similar type of plan. So can
you walk us through what those are and what we should be thinking about as we’re opting into
different programs?
Amanda:
Sure, I’d love to. I think we could do an entire podcast just on pre-tax retirement withholding
elections, but try to keep it short and sweet. Here you’ve got a couple of different main types of
retirement savings opportunities. You can have a pre-tax plan or a post-tax plan. Hopefully your
employer offers some of these. If not, it’s possible to set them up yourself, but most places offer
at least a pre-tax plan, like you said, a 401k or a 403b. So it’s got a couple of different really nice
features. Let’s say you are making a hundred thousand dollars a year to keep it simple because
doing math out loud is not as much fun as doing a podcast and you want to set aside $20,000 of
your income for retirement. Now when you go to do your taxes at tax time, your taxable income
is $80,000 instead of a hundred thousand dollars.
So you’ve avoided taxation for now on that $20,000 that you’ve set aside and you’ve likely
gotten yourself into a slightly more favorable tax rate on the money that you are accountable for
paying taxes on that year. So it reduces your taxable income, it can lower your marginal rate,
and then that money grows in a plan tax-free. You’ll be able to make some elections. You can
choose a target date retirement fund where there’s going to be a mix of stocks and bonds and
different mechanisms to help you grow, but it will grow until you are obligated or you choose to
start taking the money out, whichever comes first, and then at that time it’ll be taxed like an
ordinary paycheck because it is a paycheck. It’s just a paycheck that’s been on hold for you for
many years. So you get that unbeatable power of compound interest on no tax money, so it’s
able to grow and grow and grow.
And then you take the money out when you’re in retirement and the idea is when you are retired
and you’re not working at your high paying job anymore, you’ll be at a lower tax rate, or maybe
you’ll have retired two estate that has more favorable state income tax rates and you’ll be able
to enjoy that money at a lower tax rate. So you have the opportunity to set aside as little as
zero, which we certainly can’t recommend or as much as $23,000 in a pre-tax retirement
account. And if you’re over 50, you can actually set aside an additional $7,500 there. So that’s
the baseline type of plan that people tend to get into. It’s the ordinary thing, and a lot of
employers will match your contributions, which is just gravy. They might match a hundred
percent of your contributions up to 6% of your salary, something like that.
There’s usually a formula that they’ll match. So you’ll be able to go in and see your retirement
account growing and you’ll be able to see your contributions, your employer’s contributions, and
then the performance, which hopefully over time is positive. We say it’s kind of like weighing
yourself. Don’t check every single day. You’ll drive yourself crazy because there are going to be
dips in the market, but overall the stock market tends to return for investors. So in the long term,
you will hopefully grow that money and of course the earlier you start the better. It is really hard
to make up for lost time with retirement contributions. So the best thing you can do for yourself
is start setting aside something. If this is your first job out of college and you’re a new young
employee, it’s tough. You’ve got to make the rent. You want to do the trips and have your fun,
but the best thing you can do for yourself is force yourself to set aside a little bit and give it 40
years to grow tax-free. You won’t be sorry if you do that.
Theresa:
I think to your point for the employer match, even if you can’t max out your 20,000 plus a year at
least thinking about, okay, if my employer’s going to give me 3000, then I should at least give
3000 to maximize what the employer is giving me. Otherwise, you kind of leave dollars on the
table that the employer would otherwise give you.
Amanda:
Yeah, you’re missing free money right there, so you should at least contribute enough to get the
match from your employer. Absolutely. Great point. There are also post tax plans. So why do we
call it post-tax? Because it’s after the paycheck has gone through that withholding we talked
about earlier and hit your bank account that you can go ahead and make these contributions.
So you’ve paid income tax on it, it’s part of your taxable income for the year, but you still have
some opportunities to have some additional tax-free, truly tax-free growth on that money. So
we’re talking about a Roth 401k or a Roth IRA and those grow because you’ve already paid
taxes on it today, those grow tax free forever. There are some pretty complicated rules on who
can contribute and how much, if this is something that you’re interested in, make sure that you
take the time to really understand what the rules are with your individual plan or with your
accountant or with your advisor.
But typically you’re still capped at the same cap we talked about before, $23,000 for your
combined contributions in a Roth 401k or Roth 403b. And certain taxpayers can make
contributions to a Roth IRA, which is not administered by your employer, so it’s not going to be
part of your onboarding paperwork, but something you can do on your own with your investment
advisor. And that cap is a lot smaller. If you can contribute up to $7,000 per person, it goes up a
thousand dollars if you’re over 50. And there are some different considerations there in terms of
what might be deductible or what might not be deductible depending on your income. So it’s
really good to think about your individual facts with your advisor on that.
Theresa:
I think with the Roth 401k, it’s interesting, we don’t get new things very often, but a Roth 401k is
relatively new, so I think not all employers offer it or I think more starting to offer it. So I guess
people probably shouldn’t be surprised that they only see a 401k and not the Roth 401k option.
Amanda:
Yeah, that’s exactly right. And if we really wanted to dig into the minutiae here, think it’s possible
too to make a post-tax contribution to your ordinary 401k, but I think that’s a topic for another
episode
Theresa:
Absolutely. So beyond the retirement accounts, what are some of the other types of benefits
that you often see employers offering and employees opting into?
Amanda:
Yeah, great question. So any big workplace is going to offer health insurance and you may have
to take it depending on laws that apply to you, you may opt to take it. You may have the
opportunity to be covered by your spouse’s health insurance or if you’re young enough, your
parents’ health insurance plan. But if you’re over 26 and you’re single, your company’s health
insurance is going to be your most likely option unless you go on a state plan or something like
that. So that’s going to be something where you’re going to get a menu from your human
resources group and you’re going to have opportunities to say, do I want a high deductible plan
where my premiums are a little lower, but I pay more when I go see the doctor? I don’t get sick
very often. That sounds great. Or to say, well, you know what?
I know I’ve got a million chronic things. I’d like my visits not to pinch my pocketbook too much
and have more of ’em covered, even if that’s in exchange for slightly higher premium. So be
able to think through your options there. You may have the opportunity to enroll in dental or
vision insurance. Always a good thing to consider. And you may even have a flexible spending
account option that could cover either just vision and dental or all of your medical costs. And
again, that’s a pre-tax set aside. You may have the option to fund, so that lowers your taxable
income for the year, and it’s got to be used for specific expenses and the availability of those is
going to depend on your company’s offerings and to some extent on which health insurance
option you choose.
Theresa:
So it’s really kind of about evaluating, taking a look at your specific offerings from your company
and figuring out, okay, what’s my health need, maybe my dental or vision need? And then really
kind of choosing the best based on personal circumstances.
Amanda:
Exactly right, exactly right.
Theresa:
So then what about dependent care is something that I think people talk about when thinking
about benefits. Can you tell us a little bit about that and what the factors might be there?
Amanda:
Sure. Well, we both have kids and we’re working moms and we know somebody’s got to watch
them and that costs money. So a dependent care flexible savings account is one of my favorite
things. You can set aside about $5,000 a year. Again, pre-tax, and it’s got to be used to pay a
childcare provider, and that can be a nanny, an au pair, an afterschool program, a daycare, and
it’s another deduction from your annual income. You don’t have to pay taxes on, and you’ve got
to keep your records. You’ve got to get a receipt from the person you’re paying to watch your
kids. You’ve got to have kids who are a qualifying age. It’s got to be the right kind of setting and
the right kind of care, but it’s really a terrific option to force yourself to budget. You’ve got the
money set aside and it’s ready there to pay your childcare, and you get a tax benefit on it as
well.
The other options you may see are things like life insurance and disability insurance, and
sometimes those are free. Sometimes you get free life insurance as part of your employment,
so no reason not to elect for that. I always click as many as I can that are free when it comes to
paying for term life insurance through work, it really pays to shop around. This is a group policy
that’s not super dependent on your own health and levels of fitness, and you may be able to get
a better deal on an individual life insurance plan through an independent broker. So something
to look into with a little bit of care. Same goes for disability insurance. As we all know. We all
know from seeing crowdfunding appeals on social media that these things happen and money is
really tight for families who need to take care of somebody who’s not able to work but is alive so
that life insurance hasn’t kicked in, but their expenses are really high. So disability insurance is
something to take really seriously, especially if you have people depending on you. So
something to look into for sure
Theresa:
To have some of that income replacement if you can’t work, it really kind of helps fray some of
that stress and the access to cash.
Amanda:
Absolutely. Yeah, absolutely.
Theresa:
So this has been very helpful, Amanda. Thank you. I think if I could summarize it all up just in a
couple of words. I mean there is a lot and there’s no doubt that there’s a lot, but it sounds like if
you kind of step through each question, each offering and think about what makes the most
sense from you from that W-4, looking at what your other income is, who your dependence are,
et cetera, you can kind of step through that and then really through those benefits, do you have
excess income that you want to put into your 401k or how do you want to make sure you’re
saving appropriately for that 401k to dependent care to healthcare. Really looking at what is
your circumstance and how can your employee benefits really help you meet your goals and
your needs for you and your family.
Amanda:
You’re going to be prompted to look at your health insurance elections year to year
automatically, but nobody’s going to prompt you to think about how much you’re putting in your
401k, so you might want to set that to automatically increase by 1% per year or set a reminder
for yourself to adjust your contributions. And the same with your W-4 . Once you’ve submitted it,
the company kind of has their marching orders and is going to withhold what they’re going to
withhold as a percentage of your income. So as your income increases, those things will go up.
But if you’ve elected to set aside a certain dollar amount for additional withholdings, and that’s
either too much or not enough, that’s going to be on you to remember to check and adjust as
necessary. If your withholdings are not quite right or if you move states or something else
changes. So good to set yourself a reminder of that maybe for every spring to take a look at it
again.
Theresa:
That’s a really great final reminder. Thank you so much, Amanda.
Amanda:
Thank you. Take care.
Theresa:
Thank you for joining us for this episode of Wealth Planning Illuminated. We hope you found this
topic interesting and that you will continue to explore the variety of wealth planning topics
available to you on this channel. Thank you and have a great day.
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