{"id":1065,"date":"2011-02-07T10:26:22","date_gmt":"2011-02-07T15:26:22","guid":{"rendered":"http:\/\/www.billlosey.com\/articles\/the-2-opportunity.php"},"modified":"2011-02-07T10:26:22","modified_gmt":"2011-02-07T15:26:22","slug":"the-2-opportunity","status":"publish","type":"post","link":"https:\/\/billlosey.com\/knowledge-center\/the-2-opportunity\/","title":{"rendered":"The 2% Opportunity"},"content":{"rendered":"<p><strong>What would you do with an extra $1,000 or $2,000?<\/strong> The Tax Relief Act of 2010 will give many of us the equivalent of a 2%  raise in 2011. Employee payroll taxes have been cut from 6.2% to 4.2%  this year. So if you pay into Social Security, you are looking at a rise  in your take-home pay. What are your plans for that extra money?<\/p>\n<p><strong>How about directing it into your 401(k) or IRA?<\/strong> That 2% \u201craise\u201d will show up in your paychecks throughout the course of  the year \u2013 it will come to you incrementally rather than as a lump sum.  Still, 2% is nothing to scoff at \u2013 if you make $50,000 in 2011, you\u2019re  looking at $1,000 of found money.<\/p>\n<p><strong>What could $1,000 do for you over 20 or 30 years?<\/strong> Well, let\u2019s see. If you invest $1,000 today and simply let it sit there  for two decades with a 6% annual return, you end up with $3,207.14 in  principal and interest. If the initial grand just sits there for 30  years at 6% interest, it turns into $5,743.49. (That\u2019s using annual  compounding \u2013 if you plug in 30 years of daily compounding, it becomes  $6,048.75.)<\/p>\n<p>Let\u2019s  say you take this one step further and direct an extra $1,000 into your  401(k) for 30 straight years beginning in 2011. Let\u2019s be reasonably  optimistic and assume an 8% annual rate of return across that time.  Under those conditions, your $30,000 aggregate contribution would turn  into about $125,000 with compounding \u2013 and that\u2019s not even considering  the possibility of an employer match to your 401(k) during some or all  of those years.<\/p>\n<p><strong>The money is significant for a couple. <\/strong>If  you and your spouse each make $70,000, that\u2019s an extra $2,800 coming to  the two of you in 2011 (assuming you and your spouse don\u2019t work for the  government, the railroads or in some capacity where you don\u2019t pay into  Social Security). Everyone wants a little more retirement income, and  directing 2% into your retirement plan for one year or multiple years  could help.<\/p>\n<p>While  we\u2019re on the subject of retirement income, the White House says that  the payroll tax cut will have no effect on a worker\u2019s future Social  Security benefits.<\/p>\n<p><strong>Other options for the 2% tax break. <\/strong>Most  Americans will simply spend the money resulting from this tax break.  That\u2019s not exactly a negative: the Obama administration visualized this  as a way to pump up consumer spending.<\/p>\n<p>Yet if you don\u2019t devote the money to your 401(k), you have a number of alternatives besides spending it.<\/p>\n<ul>\n<li>You could open a Roth IRA with the money.<\/li>\n<li>You  could create a rainy-day fund. Set up an auto-transfer of the money  from your checking account to your savings account. Let that $800 or  $1,000 or $1,600 or whatever accumulate during the course of the year.<\/li>\n<li>If  you have a rainy-day fund, you could put the money auto-transferred to  your savings account across 2011 into a CD at the start of 2012 (when  interest rates just might be higher).<\/li>\n<li>You could use the found money to pay off credit card debt or other consumer debts.<\/li>\n<li>You could even make an extra home loan payment at the end of 2011 (should it make financial sense to do so).<\/li>\n<\/ul>\n<p><strong>Don\u2019t underestimate the potential of this tax cut. <\/strong>If  you and your spouse each make $80,000, that\u2019s an extra $3,200 between  you in 2011 (assuming you and your spouse don\u2019t work for the government,  the railroads or in some capacity in which you don\u2019t pay into Social  Security).<\/p>\n<p><strong>This tax holiday could even be prolonged. <\/strong>In recent decades,<strong> <\/strong>we have seen<strong> <\/strong>some<strong> \u201c<\/strong>temporary\u201d  tax cuts stick around. If the jobless rate stays above 8% through 2011  (and it might), voices in Congress might push to extend the payroll tax  cut for another year. It could happen, provided the federal government  finds a way to direct more money into Social Security.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>What would you do with an extra $1,000 or $2,000? The Tax Relief Act of 2010 will give many of us the equivalent of a 2% raise in 2011. Employee payroll taxes have been cut from 6.2% to 4.2% this [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[18],"tags":[],"class_list":["post-1065","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/posts\/1065","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/comments?post=1065"}],"version-history":[{"count":0,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/posts\/1065\/revisions"}],"wp:attachment":[{"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/media?parent=1065"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/categories?post=1065"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/tags?post=1065"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}