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More Exemptions offset by more 401k contributions legal?

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Money Talk > Retirement Planning

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rackflot
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More Exemptions offset by more 401k contributions legal?  Reply with quote  

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i was at a page where it would calculate personal exemptions against 401k contributions showing how my take home pay could stay the same, more 401k for the year and lowering my taxable income.

I am wondering how to gauge this so that I can break even on income taxes next year. Here is the page:

http://www.dinkytown.net/java/Payroll.html

How do I balance the exemptions and 401k for optimum tax?
Post Wed Jul 19, 2006 2:58 pm
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Bid-Palace
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Yes,

Put everything you can afford into 401k... You will not regret it. It they offer Roth IRA, do it as much as you can. It is aftertax, and you never pay tax on it again! This is only until 2010 (as far as contributing).

If you withdrawl before 59 1/2 on regular 401k, you will end up paying 30% tax on it.

I see this everyday and it pays off to contribute and keep it in.. don't take it out unless you absolutely have to. Always rollover to a new 401k your employer offers or if you like the funds at your previous/current recordkeeper (if your balance is over 5k) keep it in there. Wait until 59 1/2 to begin withdrawling if have to. Just continue to put as much as you can afford and forget about it. Try to avoid taking out loans. If you are continiously taking out loans and consolidating them, then you shouldn't be contributing or need to cut your amount. Do some research and speak with your company's financial advisor about the peformance of the funds. I just did a statement for 6/30 today that had a fund with a 66% return in a 1 year period!

I hope this helps and let me know if you have any questions.

Thanks
Post Thu Jul 20, 2006 3:57 am
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efflandt
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I think someone may be confused. W-4 exemptions have nothing to do with 401(k) contributions which are pre-tax, therefore, automatically reduce withholding (no withholding for contributions deducted from pay).

So you should basically follow W-4 instructions based on expected deductions or taxable investment income/loss (or if you qualify for deductable IRA contribution). While you can adjust W-4 so you owe some tax instead of the gov't borrowing your money (big refund), you should not cut it too close. If you owe more than $1000 federal tax at final filing time for the year, you "might" be subject to underwithholding penalty.

For example, previously I had increased W-4 exemptions to account for home interest and property tax deductions (so refund was hundreds instead of thousands). But last couple of years I decreased W-4 exemptions to less than normal to almost cover gradual IRA to Roth IRA conversions (paid about $500 during 2005 filing, instead of refund).

If you habitually fail to have enough withheld (or make it up with quarterly estimated tax payments), withholding from certain investment distributions may be manditory, instead of optional.
Post Thu Jul 20, 2006 5:56 am
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