Tax-advantaged workplace benefits: How they work

Although workplace retirement plans may get the most attention regarding tax-advantaged workplace benefits, they’re far from the only benefit that offers employees a way to reduce their taxable income. Other benefits, such as flexible spending or health savings accounts, can help employees use their pre-tax income for common expenses. These are just two of several tax-advantaged workplace benefits, with many others that can help you maximize your money.

How tax-advantaged benefits work

Tax-advantaged workplace benefits can help employees in several ways. First, they provide workers with a means of saving for retirement, paying for healthcare and childcare, and sometimes even helping tackle student loan debt. Second, they reduce your taxable income since they are “pre-tax” benefits. Therefore you are not liable for paying income tax on the money used for these qualifying investments.

The more pre-tax income you can devote to tax-advantaged benefits every paycheck, the more you reduce the amount of money eligible for taxes. You can still access the funds you devote to these benefits if you use them for eligible expenses. Your income will be lower for tax purposes, all because you earmarked money for specific, tax-advantaged needs. 

Why tax-advantaged benefits are important

Tax-advantaged benefits, such as a retirement account, make it easier to save automatically. Since you allocate how much of your paycheck goes into a retirement account, flexible spending account (FSA), or health savings account (HSA), you can “set it and forget it” as far as funding your accounts is concerned.

The money you put into these accounts can go toward everyday purchases: FSAs can cover dental, medical, vision, and pharmacy costs. HSAs can serve a similar purpose but are only available to people with certain kinds of high-deductible healthcare plans. HSAs allow you to carry a balance across several years, whereas your FSA is a “use it or lose it” account requiring you to use all of your funds within the year or forfeit the remaining balance.

In the case of retirement accounts, tax-advantaged benefits plans can help you figure out where to start saving for your post-work years. Workplace retirement plans take much of the guesswork out of picking out investments, giving you options based on when you plan to retire or your risk appetite.

If your employer offers matching retirement account contributions, you can grow your money much more. You will typically send a percentage of your paycheck into your retirement account, which your employer may match up to a specific rate — maximizing your contribution helps you take full advantage of what your employer contributes.

Common tax-advantaged work benefits

There are several kinds of tax-advantages work benefits that your employer may provide. Check with your human resources or benefits department for a complete list of what your employer offers.

• Accident and health benefits (including health care): These benefits help you cover expenses related to health and injury costs, reducing the amount you need to pay if you require medical attention.

• Dependent care assistance: Childcare and caring for other dependents can add up, but assistance programs can help you set aside money before taxes to help cover these costs.

• Educational assistance: These benefits can help you pay education-related expenses, such as tuition or books, for courses relating to your job or career advancement.

• Employee stock options: Some businesses offer employees the opportunity to receive or purchase company shares as an investment tool. 

• Group-term life insurance coverage: Life insurance plans can help your loved ones cover expenses if you become disabled or pass away.

• Health savings accounts: HSAs allow you to put aside pre-tax dollars into an account designed to help you pay for health-related needs.

• Retirement planning services: Your employer may offer resources to help plan and save for retirement.

• Transportation (commuting benefits): These programs allow you to earmark money for transportation costs, such as train tickets or parking spots, before counting the cash as taxable income.

• Tuition reduction: Like educational assistance, tuition reduction benefits can help you better afford educational pursuits, even if your employer does not wholly fund them.

How to get on the right track with retirement accounts

Saving for retirement can not only be difficult but stressful as well. Workplace retirement accounts help take some of the guesswork out of retirement investing, all while reducing your taxable income by funding your account. Common steps include:

• Opening and funding your account: Your employer can help you set up your retirement account, either at the open enrollment period, upon starting a new job, or after a significant life change. 

• Determining how much to contribute from each check: You will likely have the option to pick a percentage of your per-paycheck income to go toward your retirement account. More is often better so long as you can afford to invest. Investing at least as much as your employer matches in contributions is advisable.

• How to pick the right investment plan for your life stage: Investment strategies often vary depending on how close you are to retirement. Early savers may opt for more aggressive options while 

• Catching up on contributions: If you haven't put away as much as you'd like for retirement and you're nearing the end of your working years, you may qualify for “catch-up” contributions above yearly contribution maximums.

• Checking your investment’s performance: Although you can check your investing performance as often as you like, most choose to check their retirement plan performance every six months or yearly.

Conclusion

There are ways to make your income work harder for you, and taking advantage of tax-advantaged workplace benefits is some of the savviest. Setting money aside before taxes allows you to pay for ordinary expenses without having these funds count as taxable income. This can lower your overall taxable income at tax time, which can be a benefit with it's time to file your returns.