Originally Posted by Bimmerbill
New guy with another question my HR office couldn't help me with:
* * *I have the option of having my health care plan premiums and flexible savings account payments taken out pre tax.* When I set it up there was a caution that it would reduce my social security earnings.
* * *How do I calculate the savings and the possible reduction in social security earnings to see if it is worth it?*
Hunh-- healthcare premiums & FSA payments must be treated differently than Thrift Savings Plan / 401(k) contributions. My spouse's SS deduction is still 7.65% of her pay (right off the top) before the deduction is made for the TSP. It'll be interesting to see which wage number shows up in her SS earnings history-- the SS wage used for that 7.65% deduction or the (much lower) taxable income.
Anyway, assuming that HR is reading the rules correctly, first you'd want to calculate your taxes using your current pay (without the pre-tax deductions that you're contemplating). That would be federal, state, & any locality taxes. (Hang on, the fun is just starting.)
Then you'd want to plug your lifetime earnings history into the SS calculator
to see what your current SS benefits should be (without the pre-tax deductions).
Then you'll have to know how much is deducted from your income for the premiums & FSA payments. Gee, maybe even HR could figure this one out.
Then you'd have to recalculate your taxes using your new (lower) taxable income (reduced by the amount of the premiums & payments). That should give you an estimate of your annual tax savings from having your premiums & payments paid pre-tax. If you're not near a tax-bracket breakpoint then you could probably ballpark it by multiplying the amount of the premiums & payments by the tax bracket that you're currently in.
Then you'd have to plug your lower (taxable) earnings history into the SS calculator, get your lower SS benefits estimate, and see how much SS benefits you "lose".
If the loss is close to zero then it's either not significant-- or you'll want to download & install the "detailed" SS calculator.
Hopefully you're saving more now in taxes than you're losing later from SS, although an extremely detailed calculation would look at how much the savings will grow if you invest them each year against your first SS withdrawal.