Recent College Grads Can Aid Savings With Fringe Benefits Lessons

Congratulations on your college graduation, and welcome to the professional working world. The demand for talented workers is at an all-time high in the US, and this bodes well for you to land a higher than average salary and possibly a sign-on bonus.

Take advantage of the market and the fact that companies are willing to make substantial offers to top talent. Do some job shopping and pick the company that provides the best pay alongside the best alignment with your career goals.

When I graduated in 2006, I wish I had spoken to a CPA or personal financial specialist to understand and leverage my offer letters to ensure I received both the highest income and the best fringe benefit package possible. Specifically, I wish I had an expert explain the value of the fringe benefit plans.

You’ll learn that it’s not just the wages that matter but your entire compensation package. Keep this in mind as you begin your interviews, and review your offers carefully.

Navigating the W-4

As soon as you sign your offer letter, you’ll have your first tax encounter—the reasonably new W-4 form—and a request for how much taxable income you would like withheld. Unlike before 2020, you won’t have to pick a number or decide how many to claim on your form. If you’re single without a spouse, dependent child, or immediate family member, you will check single. Likewise, if you are married, you check the married box.

Be careful, though—the W-4 isn’t as simple for those who are married to other high-income (six-figure-earning) individuals and single people who decide to work two jobs simultaneously. Don’t be afraid to take additional time to have a tax professional review your W-4 to ensure you and your family make the correct selection based on your situation. It’s better to get this right up front than to get a big bill from the IRS at the beginning of the following year.

I always recommend looking at your first three pay stubs to ensure your withholdings are in the ballpark of your expected year-end tax rate. My rule of thumb is that taxes are like tithing—if your withholding is 10% or less, then you should talk to a tax professional and you payroll office because withholding typically can’t be at or below the lowest marginal tax rate of 10%.

401(k) Contributions

Next, you’ll need to decide how to contribute to your retirement if your organization has a 401(k) plan. You’ll be entering the equities market when most investors and talking heads are bearish.

This is a perfect time for a new investor with a longer time for investment to get into the market, so have no fear. Hopefully, your organization has some good low-cost, no-load mutual or index funds into which you can invest your pre-tax income.

If you’re unsure what funds to invest in, feel free to reach out to a tax professional or personal financial specialist to determine which investments fit your risk tolerance and investment time horizon. Your employer also may contribute to and/or match your contribution to the retirement plan. Take full advantage of your employer’s contribution and try to get the maximum contribution possible.

Remember, with the market dipping and inflation at an all-time high, you could be getting a double gift. Buying depressed equities with inflationary wages is a good recipe for maximizing your initial market investment.

If your income doesn’t exceed the income limit of single ($153,000) or married ($223,000), look at your organization’s retirement plan options to see if there’s a Roth 401(k) option. If it does, I recommend taking it—the Roth 401(k) has some unique opportunities that will benefit the most recent graduating class.

The Roth 401(k) allows you to make a tax-free withdrawal from the account and avoid required minimum distributions when you turn 70 1/2. These benefits are excellent weapons against the current inflationary environment and a way to protect your retirement income against future income tax rate increases. Whatever retirement option you choose, keep a long-term investment horizon and don’t be spooked by today’s investment environment.

Loan Payments

As you begin your career, you’ll want to make room in your budget to repay those pesky school loans. There are few good times to incur debt, but this is probably the best time to repay it. Here’s why: You likely incurred your debts in a low inflationary and low-interest-rate environment.

The quickest way to pay off low inflationary debts is with inflationary dollars. With new hire salaries at an all-time high due to the lack of talented labor, your salary will provide you with more cushion than other graduating classes to pay those debts.

In addition, remember that your degree is not just benefiting you; it’s helping your employer. As a result, I would look for employers with benefits packages that include the repayment of student loans. The best employers understand the work and financial investment you have made to empower yourself. They’re also willing to pay for top talent with standout wages and benefit packages such as repayment of student loan interest.

It’s a great time to enter the workforce for graduates such as yourself with skills employers are hungry to have within their organizations. Wages are high, and skilled labor is in short supply. Take advantage by getting the best compensation package possible and ensure your performance aligns with that package. You will be financially and professionally rewarded if you do those two things consistently.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jeff Wilson provides clients with financial planning, tax preparation, CFO and small business consulting services. He is the principal of the W2 Group, LLC in Clinton, Md., and a member of the AICPA’s personal financial planning executive committee.