Three Simple “Tricks” for a Bigger Paycheck and a Common Retirement Pitfall to Avoid

Introduction

As an early-career physician, you work hard year-round, and it’s always a pleasant surprise when your paycheck suddenly gets a little bigger.

This time of year can be particularly exciting because many attending physicians notice a significant increase in their take-home pay.

But why does this happen?

Understanding the reasons behind these mid-year and/or end-of-year paycheck jumps can help you better manage your finances and make the most of your hard-earned money.

Let’s explore three ways your paycheck may unexpectedly jump towards the end of the year and one common retirement pitfall to avoid!

Introduction

As an early-career physician, you work hard year-round, and it’s always a pleasant surprise when your paycheck suddenly gets a little bigger.

This time of year can be particularly exciting because many attending physicians notice a significant increase in their take-home pay.

But why does this happen?

Understanding the reasons behind these mid-year and/or end-of-year paycheck jumps can help you better manage your finances and make the most of your hard-earned money.

Let’s explore three ways your paycheck may unexpectedly jump towards the end of the year and one common retirement pitfall to avoid!

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Subscribe to The Dream Bigger – Physician Edition Newsetter

A weekly newsletter designed for early-career physicians and anyone looking to enhance their financial well-being.

Discover helpful tips, strategies, and insights to dream bigger and take control of your financial future. 🥼

Get student loan updates, money-saving tips, and financial strategies – all delivered to your inbox.

Way 1: Hitting the Social Security (SS) Wage Base

☁️ One of the main reasons your paycheck might increase is hitting the Social Security (SS) wage base.

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☁️ For 2024, the SS wage base is $168,600.

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☁️ This is the maximum income subject to the 6.2% Social Security tax each year.

☁️ Once you hit this amount, your income is no longer subject to this tax for the rest of the year.

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Benefits of Reaching the SS Wage Base:

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☁️ No More SS Tax: After earning $168,600, your income is no longer subject to the 6.2% SS tax.

☁️ Larger Paychecks: Without SS tax deductions, your take-home pay increases.

Hitting the Social Security (SS) Wage Base Example:

☁️ Annual Salary: $300,000

☁️ Monthly Gross Pay: $25,000 ($300,000/12)

☁️ SS Tax Before Hitting the Cap: $25,000 × 6.2% = $1,550

☁️ Net Pay After SS Tax: $25,000 – $1,550 = $23,450

☁️ After Hitting the Cap: No more SS tax

☁️ Net Pay After Hitting the Cap: $25,000 (full amount without SS tax deduction)

Benefits of Reaching the SS Wage Base:

☁️ Before hitting the cap: You pay $1,550 in SS tax each month.

☁️ After hitting the cap: You keep the full $25,000, increasing your take-home pay by $1,550.

Note: This example does not include all taxes and deductions that may apply to your paycheck.

Way 2: Maxing Out Retirement Contributions

☁️ Another reason your paycheck might jump is if you max out your retirement contributions (like a 401(k) or 403(b)) earlier in the year.

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☁️ For 2024, the annual 401(k)/403(b) contribution limit is $23,000.

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☁️ If you max out your contributions in nine months (September), those deductions stop, and your take-home pay increases for the remaining three months.

Maxing Out Retirement Contributions Example

☁️ Annual 401(k)/403(b) Contribution Limit: $23,000

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☁️ Monthly Contribution for 9 Months: $2,555.56 ($23,000 ÷ 9)

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☁️ After Maxing Out in September: No more 401(k)/403(b) deductions for the rest of the year, increasing your take-home pay by $2,555.56/month for October, November, and December.

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IMPORTANT: Understanding the 401(k)/403(b) True-Up Provision

☁️ A 401(k)/403(b) true-up is an additional, end-of-year matching contribution made by an employer to ensure that employees receive the full match they are entitled to, even if they max out their contributions early in the year. This provision is crucial for those who frontload their 401(k)/403(b) contributions.

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How It Works:

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☁️ Employer Match: Employers typically match a percentage of your contributions up to a certain limit.

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☁️ Frontloading Contributions: If you contribute the maximum amount early in the year, your employer might stop matching contributions once you hit the annual limit.

☁️ True-Up Provision: If your plan includes a true-up provision, your employer will make an additional contribution at the end of the year to ensure you receive the full match.

401(k)/403(b) True-Up Provision Example

☁️ Annual Salary: $300,000

☁️ Monthly Gross Pay: $25,000 ($300,000/12)

☁️ Employer Match: 5% of salary

☁️ Employee Contribution: $23,000 (maxed out by September)

☁️ Monthly Contribution for 9 Months: $2,555.56 ($23,000 ÷ 9)

☁️ Employer Match Without True-Up: $11,250 ($25,000 x 5% x 9)

☁️ Employer Match With True-Up: $15,000 (full 5% of annual salary)

In this example, if your 401(k)/403(b) doesn’t offer a true-up provision and you max out your contribution in September, you are leaving $3,750 of free money on the table…

Call to Action:

☁️ Check with Your Employer: Find out if your employer offers a true-up provision. Ask Human Resources (HR) if they will apply matching contributions for pay periods after you hit the maximum employee 401(k)/403(b) limit. If your plan includes a true-up provision, you can confidently frontload your 401(k)/403(b) contributions. Without a true-up provision, frontloading could mean missing out on part of your employer’s match, effectively leaving money on the table.

☁️ Check Your 401(k) Summary Plan Description (SPD): If your HR department is unsure whether your plan offers a true-up provision, request the SPD and look for information on the company matching policy. This information is often not proactively provided in your annual benefits packet during open enrollment.

☁️ Revise Your Contribution: If your 401(k)/403(b) doesn’t offer a true-up provision and you are currently frontloading your contribution, log into your retirement portal and update your contribution. You will want approximately 7.7% or $1,917 ($23,000 ÷ 12) to come out of each month to maximize your employer match.

• • • If Paid Twice a Month: Adjust your contribution to approximately $958.50 per paycheck ($23,000 ÷ 24), which is about 3.83% of your monthly gross pay.

    • If Paid Biweekly: Adjust your contribution to approximately $884.62 per paycheck ($23,000 ÷ 26), which is about 3.54% of your biweekly gross pay.

Way 3: Maxing Out Health Savings Account (HSA) Contributions

☁️ Similar to maxing out your 401(k)/403(b) contributions, if you max out your HSA contributions early, your paycheck will increase once those deductions stop.

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☁️ For 2024, the HSA contribution limit is $4,150 for a single person and $8,300 for a family.

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Maxing Out Health Savings Account (HSA) Contributions Example

☁️ Annual HSA Contribution Limit (Single Person): $4,150

☁️ Monthly Contribution for 9 Months: $461.11 ($4,150 ÷ 9)

☁️ After Maxing Out in September: No more HSA deductions, increasing your take-home pay by $461.11/month for October, November, and December.

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Conclusion

☁️ Seeing your paycheck increase unexpectedly is always a pleasant surprise. Whether it’s from hitting the SS wage base, maxing out retirement contributions, or HSA contributions, understanding these factors can help you better manage your finances and enjoy those extra funds. And don’t forget to check if your employer offers a 401(k)/403(b) true-up provision to maximize your retirement savings!

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☁️ By being proactive and understanding these financial milestones, you can make the most of your income and ensure you’re not leaving any money on the table. So, take a moment to review your contributions and reach out to your employer to confirm the details of your retirement plan. Your future self will thank you!