We’re in the last quarter of the year and now is a good time to make sure you are on track for contributing what you wanted to contribute to your retirement accounts prior to 2025.
You still have time to make changes to your withholding to ensure you end up where you want to be.
Why?
Mainly because investing helps increase your wealth. Also, because the tax code is written to incentivize saving for retirement so you’ll pay less taxes.
This is especially good for anyone who has a particular reason for wanting to minimize their income.
For example, let’s say you have student loans and are on an income based repayment plan while pursuing Public Service Loan Forgiveness.
It seems like it might be a small percentage of people, but there are a lot of teachers out there and a lot of them had to get loans to get through college. Plus, there are a lot of professions that qualify even if you’re not a teacher. Anyone working for any level of government and anyone working for a 501(c) nonprofit.
For those people in that situation, it is in your best interest to ensure that your income is as low as possible so that your payments are as low as possible. Especially if interest doesn’t accumulate thanks to the latest repayment plan. (Which as far as I know is still frozen.)
How does it work?
Your payment is calculated based off of your Adjusted Gross Income, or AGI.
This means that it’s not calculated based off of what your salary is, but what you have left after you pay for your insurance and contribute to HSAs, FSAs, and retirement plans.
Even if you don’t have a retirement plan through work, you can contribute to an IRA to lower your AGI.
Why would I want to do that?
The PSLF should eventually forgive ALL the remaining balance of your qualifying loans, so why would you want to pay more of it off if you don’t have to?
The forgiveness is tax free on the federal level, but check with your state to see how you would be affected by forgiveness.
It’s worth doing the math to see how much you would benefit, even if you were charged taxes on the forgiven amount. The tax will not equal the forgiven amount, so it doesn’t make sense to want to pay it all rather than get forgiveness and just pay the tax.
My experience
Although I haven’t been forgiven, yet, this program has helped me so much already. Since I had to shrink my income in order to make my payment as low as possible, I ended up contributing a large part of my income to my retirement accounts for the past 7 years.
This benefited me in two ways. 1, I was able to have a small or even nonexistent student loan payment each year. 2, most importantly, because I prioritized investing rather than paying off the loans I have a sizable net worth even though my salary has been very average. At this point, even if the program were to be scrapped, I have enough to pay for them and still have a great deal left.
Your mileage may vary, so do your own math and consider whether this path is good for you.
The last thing I will say is: no one ever gets rich by saving. Investing is the best way for the majority of us to attain true wealth.