I may earn money or products from the companies mentioned in this post.
The average commute to work in the United States is reportedly 25.4 minutes. I don’t know about you, but that makes me extremely jealous. Even though I moved closer to the city since I left my parents’ house, my commute door to door is still over an hour. That means I waste literally about 20 full 24 hour days of my life transporting myself. Awesome!
Meanwhile a few years ago when I was looking this stuff up, I found out Warren Buffett’s commute is a 5 minute drive literally down the street. Some people just have it all I suppose. But in all seriousness, that’s amazing. I can’t even imagine commuting in less time than it takes me to run a mile. When I was living at my parents’ house some days it would literally take 3 hours if a train broke down or something.
So, what better way to stick it to the man than getting a tax advantage on your commute? If you’re fortunate enough to not have to drive and are able to depend on taking a bus or train to work, you’re most likely eligible for tax advantaged benefits for your commute.
You actually can qualify for what's called a Vanpool if you drive, but I'm not too familiar with it since I only take the train.
When I started my first job in the city, I didn’t even know this was a thing. It was like when I didn’t know about the 401k. Apparently it was common knowledge, only uncommon to me. These types of benefits are categorized as “Flex Spending Accounts”.
For those that don’t know, a Flex Spending Account is a personal account you can set up within your company to allocate a certain amount of your pretax dollars of your salary to whatever it is you have options for. Two examples are a Health Savings Account (HSA) for doctor appointments, ordering contact prescriptions, etc. and a namesake Flex Spending Account. Typically you will find commuter benefits under the Flex Spending Account option.
When you start working, set this up ASAP. It’s very simple, but sometimes it can take a while to set up. Like for me for instance, I had until the 10th of the month to set up my commuter benefits for the next month. So if it was May 11th and I wanted to set up my flex spending account for June, I was out of luck, I would have to wait until July to get the benefits.
I didn’t realize this at first, so now I make sure to fill this out as soon as possible.
Also another thing to note when you set up a direct deposit to the account is to remember to cancel for the month if it makes sense to, like when you go on vacation. For me, it doesn’t make sense to cancel if I go on a one week or two-week vacation. If I cancel on a one week vacation, I lose money and if I cancel on a two-week vacation, I break even, so I don’t even bother.
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So what’s the benefit of using pretax dollars for your commute?
Well, the difference between pretax and taxed dollars literally means the former is your money before it is taxed by the federal government. Nobody has touched the money yet, it’s the full dollar amount. Taxed dollars then means the money has been taxed at your tax bracket rate and you lose money before it's even given to you. The huge benefit of signing up for commuter benefits with pretax dollars then, is that you end up saving money throughout the year.
With the benefits provider given by my employer called WageWorks, the first $255 can be saved on taxes as of 2018. It might sound confusing at first but look: say you’re commute costs you $350 a month by train, and you fall under the 25% federal tax rate. If you don’t use commuter benefits, you end up getting taxed $63.75 extra each month or $765 a year ($255 x .25) x 12 = $765.
If you do use the commuter benefit, then you effectively save the full $765. According to WageWorks employees save an average of 30% on commuting costs.
Depending on the distance, you could potentially be saving yourself $1,000 a year, that’s great. If you saved and invested $765 in an S&P 500 index fund for 40 years, without even dividends reinvested, you would get $174,867.
You can also use these benefits for parking as well. There’s a quote from someone on their site that says they save over $900 a year in benefits for parking alone.
That’s not even including the commute!
So let’s assume they save $765 in addition to the $900 in parking, which if you live in New Jersey isn’t that far-fetched to believe, trust me. That’s $1,665 a year. In 40 years that could turn into $380,592 just from commuting benefits.
Up close when you’re not looking at the big picture, it doesn’t seem like that big of a deal. That’s why I try to give you a better idea by showing you the effect compound interest can have on your net worth if you stick with it. Sure $1,665 doesn’t sound like too much, but $380,592 is nothing to shrug off when you consider that was just from tax advantaged dollars
Do you have a flex spending account you can use for commuter benefits? If so, do you use it? How much do you save?
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