There is no telling what my Human Resource department thinks of me. They finally stopped asking questions about my erratic 403(b) retirement contribution requests and just process them now as is.
I changed my contribution from 85% of my salary to my upper limit of 87% for several pay periods while I was front-loading. Then down to 19%. For yesterday’s check, I went all the way down to a 3% retirement contribution. It will likely be about 5-6% for the rest of the year. All in the name of an experiment for the Max Out of Pocket blog!
The 3% contribution was set to illustrate what a normal Average Joe Saver contribution might look like for someone in my position. Thus, I got a normal paycheck on 4/12/2019! Much larger than my $12.00 paycheck from 3/1/2019, but I paid a lot more in taxes too.
As you know, maxing out my 403(b) retirement account in 2019 defers 22 Cents on the Dollar in federal tax for Mr. and Mrs. Max OOP. This totals $4,180 in deferred tax that will be invested into over 500 of the best companies on the planet. I also get a 3% match from my employer as long as I contribute at least 3% of my salary every pay period.
Front-Loading gets me part of that $4,180 tax deferral even earlier. Employers calculate federal tax after the retirement contribution each check, so the greater the retirement contribution the less federal tax paid for that pay-period. FICA taxes and medical insurance premiums stay the same regardless of the retirement contribution.
Here are the results of my experiment. It clearly shows the federal tax burden increase as my retirement 403(b) contribution decreases. As you can see, I am modeling this for two alter egos at my hospital that make exactly the same amount as me. Please allow me to introduce Average Joe Saver and Even Steven.
THE TALE OF THREE SAVERS
AVERAGE JOE SAVER
Since Average Joe Saver read my Matchmaking article, he set his 403(b) retirement contribution at the minimum amount required by our employer to capture the 3% match over 26 pay periods. Why would Average Joe save any more than that? After all, considering where the world is, he figures he probably won’t live to see retirement. He will save 3% just in case he makes it through life’s gauntlet and needs a few dollars to celebrate by sharing a Guinness with his closest nursing home buddies. For my 4/12/2019 check, I set my contribution all the way down to 3% to model Average Joe Saver. As you can see, Average Joe will need to pay about $600 to the federal government for 26 pay periods totaling almost $16,000. He also gets the largest amount deposited into his checking account every week. Average Joe Saver gets a C for showing up to class.
Even Steven is pretty slick. He knows that he should max out his retirement account at $19,000, but he thinks front loading is too advanced for him. He also isn’t sure he can fund his weekly micro-brew tasting club and keep his house heated to an even 75 degrees on a $12 paycheck. Steve opts to just put in the same amount all 26 pay periods. Nothing wrong with this, just not fully optimized.
I decided to model this with my 3/29/2019 paycheck. In a perfect world, this would come out to $731 for 26 pay periods ($731 X 26 = $19,000).
But, my employer makes me select big “round” contribution percentages to make their life easier. So in this case, 19% ($738) is the closest I can get to an equal distribution over 26 pay periods to come to $19,000. So for 25 pay periods, Even Steven would contribute $738 to his retirement with his last contribution of the year coming in at $562 for a total of $19,000. As you can see, Even Steven pays $459 in tax per pay period, totaling just over $12,000 for the year. This is $3,600 less than Average Joe will have to pay throughout the year. Even Steven gets a B.
Other than the fact that he tends to procrastinate, Max OOP is a mastermind wizard. After missing his first pay period due to pure laziness, he strategically puts 87% of his paycheck into his retirement account for his early 2019 paychecks. He only has to pay the federal government $17 on these checks. He knows this tax will increase later in the year and his checks will look more like Average Joe’s. He also knows in total, he will pay about the same tax as Even Steven. But Max OOP is greedy and wanted his money earlier in the year. Since Max OOP is allowed one tardy, he still gets an A+ for 2019 front-loading.
Only 8 pay periods into 2019 and Max OOP paid the federal government just $1,842. Even Steven has paid $3,674 and Average Joe Saver has paid Uncle Sam $4,798. Not even being fully optimized, Max OOP has almost $3,000 more in his pocket than Average Joe and over $1,800 more than Even Steven. It’s only April and Max OOP already has over $15,000 in his 403(b).
By front-loading, I am basically getting my hands on a big chunk of the $4,180 tax deferral and investing it NOW instead of slowly getting it over the course of the year.
This is likely how the rest of the year’s “tax flow” would look for Max OOP, Even Steven, and Average Joe.
Max Out of Pocket for front-loading when fully optimized = $17.00 in taxes to Uncle Sam.
How much have you front-loaded this year?