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.
Tue Sep 25, 2012 2:45 pm
clydewolf Senior Member
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Re: Increase 401k or reduce fed exemptions
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.
Without knowing much much more about your budget, it is difficult to say which way is the best for you.
Tue Sep 25, 2012 10:17 pm
coaster Senior Advisor
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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)
