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Increase 401k or reduce fed exemptions

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TonyLS
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Increase 401k or reduce fed exemptions  Reply with quote  

I end up paying federal tax every tax year above and beyond the weekly payroll deductions. In order to minimize this amount that I have to pay can I increase my 401k contribution instead of decreasing my federal exemptions? Shouldn't this reduce my tax liability while saving for retirement? I'm currently not at the limit for 401k contributions, I'm at the tuition and wedding stage of my life with my kids.
Post Tue Sep 25, 2012 2:45 pm
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clydewolf
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Re: Increase 401k or reduce fed exemptions  Reply with quote  

quote:
Originally posted by TonyLS
I end up paying federal tax every tax year above and beyond the weekly payroll deductions. In order to minimize this amount that I have to pay can I increase my 401k contribution instead of decreasing my federal exemptions? Shouldn't this reduce my tax liability while saving for retirement? I'm currently not at the limit for 401k contributions, I'm at the tuition and wedding stage of my life with my kids.

TonyLS,

Consider yourself lucky or smart, It is better for you to pay some tax than to have paid too much and get a large refund.

If you can afford it the increased 401k contribution will lower your taxable income today.
It will also cause a decrease in your take home pay.
Then in the future when that money is distributed from your 401k (or rolled over IRA), taxes will need to paid.

If you want to change your withholding, you can use one of these calculators:
- at the IRS: http://www.irs.gov/Individuals/IRS-Withholding-Calculator
- at paycheck city: http://www.paycheckcity.com/calculator/w4assistant.html;jsessionid=97D975D9CAA860F3D6FACAC767A73E63?execution=e1s1

I noticed PayCheckCity there is a 401k calculator: http://www.paycheckcity.com/calculator/401k/us/alabama/401kcalculator.html

Without knowing much much more about your budget, it is difficult to say which way is the best for you.
Post Tue Sep 25, 2012 10:17 pm
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coaster
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Increasing 401(k) contributions for the express purpose of reducing your income tax is silly. And I speak from the experience of having done exactly that. Keep in mind that if you're in a 25% marginal tax bracket, for example, that a $1 401(K) contribution reduces your tax liability by 25 cents.

However, if the tax reduction is only an incidental factor; that your primary reason for increasing your contributions is to increasing your retirement savings, then by all means go for it (subject to the other qualifiers mentioned above)

~Tim~
Post Wed Sep 26, 2012 5:41 am
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