By Kevin Estes

2023 was a busy year! 🎢

• Inflation started the year high and was tamed

• There were widespread tech layoffs, including 5,000 positions at T-Mobile

• The S&P 500 returned approximately 26.3% for the year

For more, check out the 2023 Year in Review.

Potential steps for T-Mobile employees this month

Financial steps T-Mobile employees might take in January include:

1. Submit dependent care reimbursements

2. Update net worth estimate

3. Refresh long-term projections

4. Evaluate Mega Roth

5. Begin gathering tax forms

6. Plan summer vacations and camps

1. Submit dependent care reimbursements

The biggest benefit of the dependent care Flexible Spending Account (FSA) is tax savings.

A single filer or a married couple filing jointly may contribute up to $5,000 to a dependent care FSA. Doing so saves federal and often state income taxes.

The biggest downside is potentially losing the funds! Only $610 in 2023 - and $640 in 2024 - can be rolled over to the next year. Anything above that is forfeited. “Spending” is the critical term in Flexible Spending Account.

Someone has an extra 2.5 months after the end of the year to submit reimbursements for costs incurred the previous year. However, it’s best to do so well before March 15th in case there are any issues!

The goal of the Flexible Spending Account is to provide a tax break so family members can work. These funds can’t be used to pay for:

• Kindergarten or other tuition expenses,

• overnight camps, or

• for dependent children age 13 or older - unless they’re physically or mentally unable to care for themselves.

Fortunately, older adults who live with an employee at least eight hours a day, are claimed as a dependent for annual tax returns, and are unable to care for themselves also qualify. That’s why the FSA is named dependent care and not child care.

2. Update net worth estimate

Net worth = what you owe - what you owe.

Consider a car worth $20,000 with a loan of $15,000. This is included in net worth as +$5,000 ($20,000 - $15,000).

Some people claim it’s more important to grow income. Why sweat the small stuff when you can spend that time to earn more?

Others say it’s better to spend less. How much can you really impact your income?

There’s a third option: focus on growing net worth! It’s more direct and is the primary driver of financial independence.

One of the 11 episodes in my financial independence course is devoted to what net worth is and isn’t. Sign up for the course for resources on how to better understand and calculate your net worth.

3. Refresh long-term projections

Once someone knows their net worth, the next step is to forecast its future.

This is crucial! It’s empowering - and shocking - to see how much impact small changes can have.

For instance, I have multiple clients who own real estate and were charging below market rent. Raising rent $200 a month and earning an 8% return on investments might result in an extra:

• $15,000 after 5 years

• $37,000 after 10 years

• $120,000 after 20 years

• $302,000 after 30 years

How much does cable cost these days? 😉

You can see why I’m impartial to how net worth grows!

My family and I used a template to forecast our net worth every January 1st. I don’t budget. However, I consider forecasting the the most important part of financial planning.

The episode after Net Worth in the Financial Independence Course is devoted to helping people Forecast their Potential. Sign up! There’s no cost and you can cancel at any time.

4. Evaluate Mega Roth

T-Mobile match

The biggest benefit of contributing to the 401(k) is the company match. T-Mobile matches 100% of the first 3% of contributions and 50% of the next 2%.

Let’s say a single, unmarried employee earns $100,000 a year. If they contribute $3,000 (3%), T-Mobile will also contribute $3,000 (3%). That’s like free money!

If the employee contributes $5,000 (5%), T-Mobile will contribute $4,000 (3% + half of the 4% and 5% contributions).

Many of us are willing to trade $5,000 for $9,000 each year. 😂

Tax Deferral

However, there’s another benefit - tax savings.

Contributing to a qualified retirement account like a 401(k) reduces taxable income for the year. That reduces state and/or federal income taxes for the year.

Let’s revisit our intrepid six-figure earner.

At $100,000 a year, they would likely be in the 22% federal income tax bracket and might be in their state’s 8% income tax bracket. That 30% of income gone. Poof!

Contributing $5,000 reduces taxable income for the year by $1,500 for the year:

$5,000 * 30% = $1,500

The maximum 401(k) contribution for an employee in 2024 is $23,000. (There’s also a $7,500 catch-up for employees aged 50 and wiser.)

Let’s assume the employee is 35 years old. If they contribute the full $23,000, they’ll save $6,900 in taxes for the year:

$23,000 * 30% = $6,900

That’s not bad! Between the T-Mobile matching contribution of $4,000 and the $6,900 tax savings, that employee would be $10,900 ahead.

After-tax 401(k) contribution transferred to Roth IRA

However, there’s another contribution limit. It’s a combined limit of $69,000 for 2024 for both employee and employer contributions.

Our saver isn’t close to the limit. They’ve only used $27,000 of the $69,000:

• Employee contributions of $23,000

• Employer contributions of $4,000

How could someone contribute the extra $42,000 ($69,000 - $27,000)?

Through an after-tax 401(k) contribution which is immediately transferred to a Roth Individual Retirement Arrangement (IRA) account. That’s called a Mega Roth.

Costs and benefits of a Mega Roth

A few years ago, T-Mobile enabled employees to contribute to an after-tax 401(k) and take in-service distributions. That opened up the Mega Roth to employees.

Unlike pretax 401(k) contributions, after-tax contributions 401(k) are included in taxable state and federal income. They don’t save income taxes on the front end.

However - if done right - they’re never taxed again! That is, they may avoid taxes as the investments grow and be withdrawn tax-free if criteria are met.

This is especially helpful for estate planning, as it avoids forcing an heir to pay an unpaid income tax bill.

It’s such a good deal that high earners aren’t allowed to contribute to a Roth Individual Retirement Arrangement (IRA) directly. That’s why a Mega Roth is sometimes called a Mega Backdoor Roth.

Don’t worry - Congress blessed these contributions! Taxpayers are happy to pay these taxes and they raise current tax revenue.

The primary costs of a Mega Roth are:

1. administrative complexity and

2. cash flow.

Reducing administrative and cash flow burdens

The pain of both can be reduced by contributing some of the annual bonus to the 401(k). Specifically, that would be done with the after-tax bonus contribution option. That’s for the STIP - Short Term Incentive Plan - paid to salaried employees in mid to late February.

Someone would only need to transfer the after-tax 401(k) contribution to their Roth IRA once a year. It’s best to do so immediately before the investment values change. Fidelity will automatically whisk these contributions away if the employee calls to set it up in advance.

Bonus time is also a good time for cash flow. Since bonuses may or may not happen, it’s best not to count on them. Ideally, someone would be in a position to save all of their bonus!

Mega Roth example

Let’s assume our employee who earns $100,000 a year is paid:

• $80,000 base salary paid throughout the year

• $20,000 annual bonus paid in February

They’ve already saved $23,000 into their 401(k). Now, they might be able to:

• save $15,000 into their after-tax 401(k) and

• then transfer it immediately to their Roth IRA.

By the way, T-Mobile caps the contribution rate at 75% for 401(k) contributions. The remaining 25% is withheld for taxes.

The employee might save $42,000 into their retirement accounts:

• $23,000 traditional 401(k) employee contributions

• $4,000 T-Mobile traditional 401(k) match

• $15,000 after-tax 401(k) contribution transferred to their Roth IRA

Please note: it may not make sense for someone earning $100,000 a year to make heavy Mega Roth contributions. It would depend on many factors.

5. Begin gathering tax returns

It’s important to store tax return information in a safe place.

Employers are still required to mail paper versions of these forms. My wife and I dedicate a special folder to taxes each year.

Two of the most important tax return forms for T-Mobile employees are:

• Form W-2, which contains income and tax withholding information

• Form 3922, which contains details on stock purchased through the Employee Stock Purchase Plan (ESPP)

Both of these forms need to be sent to employees by January 31st. However, they may take longer to hit mailboxes. Be on the lookout!

6. Plan summer vacations and camps

Finally, it’s important to schedule summer vacations and camps!

• Camping spots book early - especially for national parks

• Some summer camps fill up by January or February

Booking early can save on travel expenses and ensure others can join. Many T-Mobile teams have limited coverage. Requesting Paid Time Off (PTO) early can be like calling dibs!

If you have younger children and aren’t certain which camps to attend, consider visiting a camp fair. They’re often at a nearby school on the weekend and give you the opportunity to interview many camps on one day.

I hope this helps. Happy New Year! 🎆

What’s Missing?

Is anything missing from this list? If so, please let me know!

If you’re interested in a review of your specific situation…

Disclaimer

In addition to the usual disclaimers, neither this post nor this image includes any financial, tax, or legal advice.