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Are You Getting the Most Out of Your 401k?

Are You Getting the Most Out of Your 401k?

October 15, 2021

What’s better than knowing you’re doing everything you can to afford your dream retirement? How about knowing that investing in a 401(k) can help you save money for your retirement and save money on taxes right now!  Here’s how:

401(K) Contributions are Tax Deductible

Contributions to your 401(k) are made on a pre-tax basis, which means that money from your paycheck goes into your 401(k) before any taxes are taken out. As a result, the IRS allows you to deduct 401(k) contributions from your taxable income. Sweet!

Contribution limits are quite high: $19,500 for anyone 49 years old and younger. If you turn 50 before 2021 is over — or if you’re already over 50 — you can make an additional catch-up contribution up to $6,500. That’s much higher than a traditional IRA!

How 401(K) Contributions Can Reduce Your Taxes

Suppose you and your married spouse earn $150,000 per year. Under current IRS guidelines, that means you’re in the 22% tax bracket or tax liability of about $19,000 in dollar terms.

Let’s say you both contribute $19,500 to your 401(k) for a total of $39,000. While you’re still in the 22% bracket, your tax liability has dropped to about $10,500. Contributing the max to both of your 401(k)s saved you about $8,500 in taxes. Nice!  

Use SmartAsset’s calculator to estimate your taxes. Always consult a tax professional regarding your specific tax circumstances.

Are 401(k) Distributions Taxed?

Since you didn’t pay taxes on your 401(k) contributions, expect to pay Uncle Sam when you take the money out! In most instances, when you’re ready to take all your savings out of a 401(k), you’re likely to be retired. Typically, retired people have a lower income than people who are working, which means that you may have a lower tax load when you take the money out after retirement.

401(k)s are a tax-efficient way to potentially grow your retirement savings.

Contact our office today to review your current 401(k) strategy to see if it aligns with your long-term goals.

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