Tax Savings

Tax Savings

This is the time of year when saving on taxes is on everyone’s mind. 

As many of you know, your employer-sponsored 401(k) provides a great opportunity for tax savings for all employees.  A contribution to a traditional 401(k) reduces taxes without any restrictions on income.  Here is a link to a simple calculator from Fidelity Investments which projects the cost of contributions to a 401(k) based on estimated tax rates.  Simply enter your annual gross salary, the frequency of your paychecks, your Federal income tax rate and your State tax rate (if applicable).  You can enter different contribution rates to determine the optimal rate for your situation from a tax perspective.  The calculator will show the amount of your contribution as well as the resulting reduction in your take home pay.  The difference between these two numbers reflects the amount of tax savings with every contribution.  Because the larger of these two amounts is what will actually be contributed to your 401(k) account, the tax authorities are allowing you to invest the taxes you would’ve paid on this income until you withdraw money from the 401(k) in retirement. 

After determining your optimal contribution rate from a tax perspective, we encourage you to access your 401(k) account through the Ascensus website and update your deferral rate.   Simply click Your Account on the menu bar and select Deferral Rate(s) to change the contribution from your next paycheck.  While on the website, we also encourage you to update the Retirement Calculator to see the impact of your new contribution rate on your long-term plan.  Here is an article (Ascensus Retirement Calculator) with more information about this valuable planning tool. 

Don’t feel left out if you are contributing to a Roth 401(k) rather than a traditional 401(k).  While you don’t receive any benefits on your taxes now, your tax benefit is deferred until retirement and potentially even more substantial, depending on your future tax bracket since withdrawals from a Roth account are tax-free in retirement.  

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