What to Do With that 2% Payroll Tax Cut for 2011
Setup Automatic Investment Plan (AIP) for a Roth IRA
The employee half of FICA has been reduced by 2% for 2011 only, from 6.2% of gross pay to 4.2%. Rather than let that extra amount showing up in your 2011 paycheck go toward extra spending, a better idea is to put that 2% payroll tax cut to work automatically funding a Roth IRA for 2011 if you are eligible. The 2% employee FICA payroll tax cut is on the first $106,800 of gross pay, so it can be as much as $2,136 for 2011 (or $178 per month). Many mutual funds allow automatic funding of a Roth IRA (called an AIP) for as little as $50 per month - one example are the T Rowe Price Smart Choice Retirement Funds. By diverting your 2011 2% payroll tax cuts to an automatically funded Roth IRA, you also benefit from dollar-cost averaging by adding to your Roth IRA investment over time. Then you can top off your 2011 Roth IRA with other funds as they become available. For 2011 you can fund up to $5,000 in a Roth IRA (or $6,000 if you are age 50 or greater). Be sure to check whether you are eligible for a Roth IRA [see Traditional vs Roth IRAs ], before starting a Roth IRA AIP with your 2011 payroll tax cut.
I personally just set up a monthly AIP for my Roth IRA starting with January 2011 and ending December 2011 with an amount exactly equal to the 2011 payroll tax cut. Took just 10 minutes...Boom!
P.S. Here is a Clark Howard video echoing this idea: Fatter Paychecks and Less Taxes in 2011
Clare L Garner Jr CPA LLMT | 01/10/2011