If all goes according to plan, come 2011 the payroll tax for Social Security will drop by 2%, but just for 2011. Setting aside the questionable wisdom of further underfunding a program already facing financial trouble, it is still 2% more in your pocket (up to the Social Security taxable wage).
So what do you do with that money? The policy makers hope you will spend it to help “stimulate” the economy. The economists fear you will pay off debts rather than spend it and I encourage you to take the 2% and up your 401(k) or IRA contribution by 3% for 2011 (with any luck you will forget to lower it in 2012).
Why 3% more in savings, because it is pre-tax money if you put it in your retirement plan and that allows you to save more on a pre-tax basis and keep about the same amount in take home pay. Another strategy is to place the 2% (after-tax money) into a Roth IRA or into the Roth portion of your 401(k) plan if you are so fortunate. The Roth contribution means the earnings will be tax-free when you need them in retirement and with the long-term questionable status of Social Security and income taxes, tax-free money may be very attractive down the road when you most need it.
A two percent raise and you did not even have to get a good performance evaluation. This windfall puts the oil companies to shame.
Do not let it go to waste.
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- Roth 401(k) and Roth 403(b) Plans (turbotax.intuit.com)
- Boost Your Retirement Savings (turbotax.intuit.com)
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