Potential Financial Steps for Tech Professionals in May

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we'll get to the May steps in a moment.

But first - here are some links you may want to save for later.

How to Minimize Lifetime Taxes

Is All Debt Bad?

Schedule Your PTO ASAP

Now, let's get on to the blog! 😀

Nearly Summer

Families with school-age children are BUSY. If that’s you, you’ve got this!

Fortunately, summer’s almost here.

Potential Steps for Tech Professionals This Month

Steps tech employees might take in May include:

1. Review tax withholding (Form W-4)

2. Update goals and financial plan

3. Check student loan / other debt balances

4. Fund education savings

5. Schedule fall Paid Time Off (PTO)

1. Review Tax Withholding (Form W-4)

Having to pay with a tax return could be unnecessarily painful.

Owe Often?

Taxes can pinch cash flow.

Also, assets may need to be sold to cover the payment. That can increase this year’s taxes.

Someone who owes may also incur interest charges or penalties.

Tax software often recommends making payments throughout the year to avoid a big tax bill.

Consistent Refund?

However, there are downsides to refunds.

Some credits are non-refundable. A taxpayer might pay more in tax because they paid early!

Also, getting a refund is like giving the government an interest-free loan. That matters more when interest rates are higher.

Unique Situations

Less tax may be withheld than needed in certain situations.

• Bonuses - only 22% of bonuses might be withheld for an employee in the 35% tax bracket.

• RSUs and PSUs - only 22% of Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) may be sold as they vest to cover taxes. Remember: vests are treated like income.

• Other Business Income - a side business or rental can increase taxes. Making quarterly estimated payments can help.

W-4 Withholding

Form W-4 is about more than adding and removing family members.

For instance, someone might declare fewer dependents than they have to spread tax payments throughout the year. They can also withhold additional state and federal taxes from each paycheck.

Cash Flow

Before making a change, it’s important to consider the impact on take-home pay. Would each paycheck be enough to cover living expenses?

Bonuses are often paid early in the year. Restricted Stock Units may also vest then. Extra income can help pay a tax bill.

How to Update

Companies usually post Form W-4 and its instructions on their intranet.

If not, a Human Resources (HR) teammate will have access and know how to update it.

2. Update Goals and Financial Plan

I think of finances like surfing.

We can plan but some things are beyond our control:

• there may be a perfect wave,

• often there’s a lot of waiting, and

• watch out for sharks!

Refresh Goals

Situations change.

Someone could expect to pay in-state tuition until their child:

• gets a full-ride scholarship or

• is accepted to an Ivy League school.

The stock market might rise or fall 20% one year… or more!

Someone could get promoted or laid off.

A couple might plan to retire to a warmer climate and then decide to stay put once grandchildren arrive.

Update Plans

Major changes impact a financial plan. That’s life!

I like what Dwight Eisenhower said:

Plans are useless,

but planning is indispensable.

It’s unfortunate how software often judges a financial plan. Monte Carlo simulations estimate the odds of “success.”

It’s not really about success or failure. It’s about how much to adjust - and in what direction.

3. Check Student Loans / Other Debt Balances

Now’s a good time to check loan balances.

Student Loans

Paying off student loan debt may be a low priority:

1. interest rates could be reasonable,

2. loans may be forgiven with consistent on-time payments, and

3. they’re typically discharged at death.

Investing and saving could leave more to loved ones. “Die with debt” may be a valid plan!

Consumer Debt

The snowball and avalanche methods are two ways to pay off debt.

Snowball

The snowball method pays off the smallest balance first, then the next smallest, and so on.

Pros

• Wins now - creates momentum by paying off debts

• Cuts payments - eliminates payments on repaid accounts

• Lowers complexity - limits the number of balances to manage

Cons

• Pays more interest - does not prioritize higher interest debt

• Improves credit slower - maintains larger account balances

• Slows repayment - continues to pay higher interest rates

Avalanche

The avalanche method pays off the balance with the highest interest rate first, then the next highest rate, and so on.

Pros

• Minimizes interest - repays the highest interest debt first

• Improves credit faster - lowers credit utilization quicker

• Maximizes repayment - pays debt down faster

Cons

• Wins later - pays off the smallest balance slower

• Keeps payments - requires monthly payments on more accounts

• Maintains complexity - carries more credit balances

4. Fund Education Savings

Late spring is also a good time to save for education. The right saving vehicle could depend on a family’s location, income, and assets.

Location

States without income tax like Washington and Texas offer no immediate tax benefit for saving to a 529 plan.

Other states like California and Kentucky don’t allow 529 plan contributions to be deducted.

The benefits depend on each state’s:

• marginal income tax rate,

• state tax deduction cap,

• deduction or credit structure,

• taxpayer or beneficiary limit,

• tax parity policy, and more.

Income

While 529 plans don’t have an income limit for contributions, other tax advantages do.

The 2024 income limits include:

• Contribute $2,000 to a Coverdell Education Savings Account with Modified Adjusted Gross Income below $110,000 single or $220,000 married, filing jointly.

• Receive an American Opportunity Credit of $2,500 per student with Modified Adjusted Gross Income below $90,000 single or $180,000 married, filing jointly.

• Earn a Lifetime Learning Credit of $2,000 per return with Modified Adjusted Gross Income below $90,000 single or $180,000 married, filing jointly.

• Exclude income tax on EE or I Bonds with Modified Adjusted Gross Income below $111,800 single and $175,200 married, filing jointly.

• Deduct student loan interest paid with Modified Adjusted Gross Income below $95,000 single and $195,000 married, filing jointly.

Additional restrictions and phaseouts apply. Some of the income limits change annually.

Assets

Who owns family assets can impact a student’s financial aid.

• Up to 5.64% of assets owned by a parent count toward the Student Aid Index (SAI).

• However, the SAI includes up to 20% of assets owned by the student.

Each school uses its own calculations for financial aid. For instance:

• Northwestern University includes home equity when calculating financial aid whereas

• Stanford University does not.

5. Schedule Fall Paid Time Off (PTO)

You've already scheduled your summer vacation, right?

If not, now’s a good time to plan both summer and fall:

• rentals and hotels book,

• flight prices rise, and

• calendars fill.

It’s not just the schedules of friends and family members that matter. It's also your coworkers’!

Scheduling Paid Time Off (PTO) early is like calling dibs.

For more, check out: Schedule Your PTO ASAP.

Hey, thanks for reading my post on potential financial steps for tech professionals in May.

Just a reminder, I share a lot of resources that can help you.

Disclaimer

In addition to the usual disclaimers, neither this post nor these images include any financial, tax, or legal advice.