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Do You Qualify for a FICA Alternative Retirement Plan?

Which type of retirement account is right for you? Money Girl answers a voicemail question about using a FICA Alternative Plan, choosing the right retirement plan, and reaching your financial goals. Plus, you'll get an explainer about all those payroll taxes deducted from your paychecks.

By
Laura Adams, MBA
6-minute read
Episode #592

What Is FICA?

Let’s back up for a brief explainer of FICA. FICA stands for the Federal Insurance Contributions Act. This law mandates the Social Security and Medicare taxes that are deducted from many workers’ wages.

Most employees fund these programs by paying FICA tax of 7.65 percent up to a certain amount of earned income. What many people don’t realize is that you pay a portion and your employer must pay a matching portion as well, for a total of 15.3 percent.

The money you pay for social programs is not set aside for you in an individual account; your funds are pooled for the government to manage. Once you retire, the workforce continues to fund Social Security and Medicare while you receive the benefits.

The idea is that you and your employer contribute to social programs throughout your career. And by the way, if you’re self-employed, you must pay the entire 15.3 percent, which is known as the self-employment tax.

The money you pay for social programs is not set aside for you in an individual account; your funds are pooled for the government to manage. Once you retire, the workforce continues to fund Social Security and Medicare while you receive the benefits.

What Is the Social Security Tax?

You can collect Social Security retirement as early as age 62. But waiting until your full retirement age (which is 67 for most workers) or delaying retirement until age 70 means that you’ll receive a larger monthly benefit.

For 2019, the Social Security tax makes up 6.2 percent of the FICA total tax, which is 7.65 percent, as I previously mentioned. But you don’t pay Social Security tax on all your income because there’s a wage threshold of $132,900.

Once your earnings exceed $132,900 during the year, no additional tax is deducted from your pay. In other words, no one pays more than $8,240 ($132,900 x .062) of Social Security tax per year. However, the wage threshold typically goes up each year.

Because the Social Security system may run out of money in future decades, we’re likely to see the payroll tax increase, the wage base threshold go up, or both, in order to keep the program financially healthy.

What Is the Medicare Tax?

For 2019, the Medicare tax portion of FICA is 1.45 percent. However, high earners must pay more. Wages paid in excess of $200,000 for single taxpayers or $250,000 for married couples who file taxes jointly are subject to an additional 0.9 percent, bringing the total up to 2.35 percent.

You’re eligible for Medicare health benefits as soon as you reach age 65 (or earlier if you have a qualifying disability).

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.