What Are You Doing With Your 2% Bonus?

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Many wage earners were pleasantly surprised when they received their first paycheck in 2011 because of the reduction in the FICA OASDI tax from 6.2% to 4.2%.  Employers are still required to pay 6.2% of wages subject to the OASDI tax, but the end result is approximately one-sixth of the money flowing into the Social Security System has stopped.  According to irs.gov, the reduced contribution will not decrease future Social Security benefits.  However, logic dictates that either future benefits must be reduced or the 6.2% rate will need to be restored.  Just as Congress extended the income tax rate reductions in December of 2010, it is reasonable that the OASDI reduction to 4.2% may be extended also.  Past history has shown that when temporary tax cuts expire, the restoration of the original rate becomes a “tax increase”, and politicians are loath to increase taxes, especially a tax that hits wage earners.  If these cuts are not replaced soon, it is possible that future benefits could be reduced and you need to take steps to make up the difference from other sources.

The most logical step is to immediately increase contributions to your 401K plan by 2%.  This is funded by the OASDI reduction, so you will not see a decrease in your take-home pay.  The benefits of this action include possible matching from your employer and the freedom to invest the money as you choose.  If you do not have a 401k plan available, consider establishing a traditional or Roth IRA, and have the 2% drafted from your checking account within a few days after you receive each paycheck.  If Congress does reinstate the rate to 6.2%, you are more likely to continue contributing to your retirement plan, thus increasing your retirement income. Either way, it is a win-win situation, and you have taken further control of your retirement income.