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A Financial 101 for College Graduates Entering the Working World

June 17, 2022, 8:45 AM

After the thrill of tossing your cap into the air on graduation day wears off, your financial life gets much more complicated. You must get your career rolling, may have student loans to pay, will need to maintain health care coverage, should think about your financial future—you get the picture.

When entering the workforce, you will need to familiarize yourself with the other benefits companies are offering in addition to salary, such as compensation packages, retirement plans, and health insurance.

Tax Status

On the first day of a new job, employers will likely require you to fill out an IRS Form W-4. This is used to determine the appropriate amount of applicable federal and state income taxes to withhold from your paycheck. It is important to make sure you complete the form correctly to ensure that sufficient, yet not too much, income tax is being withheld from your paycheck. This will help avoid a surprise tax bill when you file your tax return at the end of the year.

When filling out your W-4, consider the following:

  • Your filing status. Are you married? If so, what is your spouse’s income?
  • Do you have children or other dependents? and
  • Do you have other sources of income outside of your wages from employment, such as self-employment earnings or investment earnings?

Depending on the complexity of your situation, consider getting professional tax advice to make sure your W-4 is filled out appropriately.

Compensation Package

When it comes to overall compensation packages, employers are becoming increasingly more creative. In addition to annual salary, companies are now offering additional forms of compensation such as cash bonuses, stock, and other equity compensation.

There are many variations and complexities to these types of benefits, most of which go beyond the scope of this article. It is important to do some research when comparing different compensation packages among potential employers. Depending on the type of compensation package your employer is offering, seek professional advice if needed.

Retirement Plan

Retirement plans are another significant component of many compensation packages. If there is one piece of advice I could give to young professionals starting out in the workforce, it would be to start saving as early as possible. Many people do not start saving until well into their 30s or even later in life. This is a big mistake, because the compounding of interest over a long period of time is very powerful.

To be competitive, many employers provide their employees with a 401(k) plan or access to other retirement planning vehicles. Many employers will also contribute or match a certain percentage of an employee’s contributions into their retirement account. This is free money! It is a reward just for investing in your future. Retirement plans offer you the ability to defer a portion of salary into an account that will be there for you at retirement. Currently, the law allows monies to be withdrawn penalty-free beginning at age 59 1/2.

Depending on the type of employer retirement plan, you may have the option to make tax-deferred contributions or after-tax contributions. A tax-deferred contribution allows you to exclude from your current taxable income the amount you contribute into the plan. However, when you withdraw these funds during retirement, the distributions will be includible in your taxable income at your tax rate at that time. After-tax contributions are still includible in your current taxable income; however, you will not pay tax on those monies or the earnings when you take distributions during retirement.

Determining the appropriate amounts to contribute and which type of plans to contribute to requires an analysis of your overall tax situation as well as your current and expected future tax rates.

Health Insurance

Most employers offer different health insurance coverage options such as a preferred provider organization (PPO), health maintenance organization (HMO), or a high-deductible health plan (HDHP). The costs will vary among these different options, and it is important to familiarize yourself with the different types of cost-benefits associated with health insurance coverage.

The first cost is the monthly premium. Employers will usually cover a portion of the premium, and the portion you are responsible for will be withheld and deducted from your paycheck. The amount of the monthly premium will depend on the plan you choose and the amount your employer is willing to cover on your behalf.

Each plan will likely have co-pays and deductibles. Co-pays are what is due with each doctor visit or medical event. For example, every time you see your primary physician, you may be required to pay a $20 co-pay. Deductibles are the amounts you must pay first before the health insurance coverage kicks in. The amounts of co-pays and deductibles will also vary per plan.

HDHPs have a higher deductible. However, they generally have the lowest monthly premiums. HDHPs also allow you to contribute pre-tax money into a health savings account (HSA). An HSA allows you to save money from each paycheck tax-free, and as long as the money inside of the HSA is used for qualified medical expenses, you don’t have to pay taxes on those funds.

There is also something known as a flexible spending account (FSA). It’s similar to an HSA, except whatever pre-tax money you put into an FSA must be spent by year-end, or the funds are lost. FSAs can be used with PPO and HMO plans. Both HSAs and FSAs are used to cover costs that your health insurance does not cover. Health insurance coverage is a very complicated area, but the purpose here is not to make you an expert. Just be familiar with different options, and you can continue to educate yourself on which plan best meets your needs.

Graduating college is the start of financial independence for many. The thought of entering the workplace can be a bit daunting—I know it was for me. Looking back, there are number of things of which I wish I took advantage. Hopefully, with this and other available information out there, you will be a little more prepared as you take your first steps into the working world.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Stephen Farbish is a tax partner at EisnerAmper’s Miami office.

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