Give Yourself a Tax Cut: Contribute to a 401(k)

14 Aug Give Yourself a Tax Cut: Contribute to a 401(k)

If you’re like most people, you’d probably welcome the opportunity to decrease your taxes andincrease the amount of your earnings you get to keep. Accomplishing that may be easier than you realize. You just need to start contributing more to your 401(k). That’s because the more money you can set aside in a 401(k), the more you get to deduct when you file your income taxes. We explain how this could work in practice below.

Scenario #1

Let’s assume you are in the 33% marginal tax bracket, under age 50, and able to contribute $17,500 to your 401(k) this year, the maximum contribution for 2014.

By contributing the full $17,500, you will save $5,775 in federal taxes. In other words, you will be nearly $6,000 richer come tax time. Another way to think of it is that you get $17,500 in your 401(k) while feeling like you only contributed $11,725. Yet another way to think of it is that you increased your monthly cash flow by $481.

Scenario #2

What if you are over age 50? In that case, you can contribute $23,000 to your 401(k) in 2014. (Those over age 50 can make an additional $5,500 in "catch-up" contributions every year.) Let’s also assume you are in the highest federal tax bracket, 39.6%.

By contributing the full $23,000 to your 401(k), you will save $9,108 in federal taxes. That means that come tax time, you will be over $9,000 richer. Another way to think of it is that you get $23,000 in your 401(k) while feeling like you only contributed $13,892. Yet another way to think of it is that you increased your monthly cash flow by $759.


Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.

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