Posted by: Brian | March 22, 2010

Defining Career Finances

This past weekend, I was at my Uncle’s house enjoying a pre-St. Paddy’s Day dinner. My cousin Tiffany was looking to start a new job and the subject of planning for a retirement came up. We talked about the differences between a pension, 401(k) or Differed Compensation, and IRAs. As the night went on, Tiffany explained how she had managed to save a good amount of money to help pay for college and cover her bills while attending school. She is not a big spender though she does love fashion and trying out new things in San Francisco. What surprised me about the conversation was that Tiffany had never been taught about career finances but was really good with personal finances. I am no expert in both areas but I figured that a few other people like Tiffany could benefit from a little insight on the topic.

I define career finances as the financial benefits an employee has available to them through either their employer or a private financial institution linked to their employer. The financial benefits provided by your employer include items such as a pension, a 401(k), and Flex Spending Accounts. A private institution, like TD Ameritrade, would provide employees the ability to have a direct deposit made into an IRA, 529 college savings plan, or other long term investment. Some might suggest that the private institution is not involved with your employer but since they have the ability to do direct deposit, I place them in this category.

A pension is a form of retirement plan that an employer provides to a former employee for completing a pre-defined amount of years of service. Many companies still have pensions but even more are doing away with them because of the cost to the company. For example, if you work for the same company or government for 30 years, the company would pay you a percentage of your salary after you retire. Pensions are not to be confused with a 401(k) or deferred compensation plan. A pension is provided by the employer and not contributed to by the employee.

A 401(k) or differed compensation plan is the more common way for employers to help employees in retirement. These are accounts established by the employer for the employee and both parties can contribute to them. The funds are then invested in specific ways, such as target date mutual funds or company stock, chosen by the employee. The employee can contribute up to $16,500 each year towards their 401(k) and typically employers will match the first 1-5%. Note: in recent months employers have stopped matching contributions due to the economy. The money contributed into your 401(k) is pre-tax and is allowed to grow tax-free until you begin withdrawing from the 401(k). Talk to your HR department for more information about your employer’s 401(k) plan.

A flex spending account is a relatively new concept in career finances. This account allows you to have a specific amount of money taken out of every paycheck which can be saved for medical, child care, or personal health expenses. The benefit is that the money comes before taxes which can place you into a lower tax bracket and the money is used tax-free. The downside is that you have to use the money up every year or you lose it and pay outs are in reimbursement form. For example, if you usually spend $1000/yr on child care you could place $1000 into a flex spending account. Then as each monthly bill is due, you could pay the amount and then file for a reimbursement from your flex spending account. If you didn’t spend the $1000/yr, you’d lose the excess. I don’t have experience with these types of accounts so talk to your HR department for more information.

In future posts, I will expand a little more on the subject of retirement and career finances.  I hope this helps as a good starting point.

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