Looking for some tips and tricks to maximizing your taxes? Here’s one you might not know about. The financial advisors at A. Roberts & Associates are here to teach you how to reduce your taxable income with your 401(k)! For curated plans and strategies tailored just for you, reach out to us today to schedule a consultation.
Your Brief Guide To 401(k)s
If you’re working for a company, there’s a good chance that you already have a 401(k) in place. A 401(k) is a retirement fund that’s set up through your employer, and a certain percentage is deducted from each paycheck you earn. Ordinarily, employers will match these contributions to help further maximize your total savings. But what does your retirement fund have to do with your taxes?
How Taxes Work When You Have A 401(k)
The contributions to your 401(k) are taken out of your pay before you even receive your check and are often tax-deferred. This means that as of now, you won’t be taxed on these earnings. Instead, you’re only taxed on what you receive after everything is subtracted from your pay (basically, what you see land in your bank account).
Knowing how tax-deferred 401(k) plans work is crucial in understanding how this benefits you once it becomes time to file your taxes. The year-to-date amount that is transferred to your retirement account will be subtracted from your annual income. And the less money you’re taxed on, the more you will be saving. This can translate to either a higher tax return or a lower due amount.
| Let’s say your yearly income before 401(k) contributions is $28,000. That means you’ll be taxed on $3,360 (12% of your income). After 401(k) contributions of 6%, your remaining taxable income would be at a much lower $26,320. That means you’ll only be taxed for $3,158. That’s $202 less than you would normally be taxed on, and every bit counts! |
Smart Practices For Navigating Taxes
Another way to save on taxes is knowing when to pull out your retirement fund in a way that has minimal repercussions. If you pull the funds in your 401(k) too early, you’ll be charged hefty fees in the form of increased taxes. To reduce the amount of taxes when retrieving your 401(k), it’s best to be patient and wait until the retirement age of 59 ½ when you won’t suffer any penalties for withdrawing.
A couple of less-popular methods in maximizing your taxes is by making contributions to additional funds like a Health Savings Account (HSA) which will also subtract from your taxable income. You could also convert to a traditional IRA with pre-taxed contributions to lessen the blow and have more control over your taxes.
Read more > Do I Have To Pay Taxes On Monetary Gifts?
Maximize Your Retirement By Contacting A. Roberts & Associates Today!
At A. Roberts & Associates, we know the ins and outs of maximizing your taxes so you can enjoy more savings come tax season. Contact us today to schedule a consultation and to get started on your big game plan with our retirement planning services!