Contributing to your 401k and taxes

[Ms.PacMan]

@MC4YOU2 @jaker

I replied to a couple of comments on taxes in another thread and because it's the end of the year I wanted to give examples of how contributing to my own 401k saves me money on my taxes.

Gross pay = $79,800
Fed Withholding Tax = $10,714

I contributed $18,000 to my traditional 401k which is the max allowed. I recommended the app TaxCaster to see what effect your contributions have on your taxes. These photos are from that app and show the effect.

Income reported on your taxes is minus the $18k contribution.

Single, no dependents, standard deduction.

So the first picture is income with no 401k contributions and I've already had $10,714 withheld and would still owe $2,426 - total tax would be $13,140.

The second picture is income after 401k contributions. Again I had $10,714 withheld but would receive a refund of $2,074 - total tax would be $8,640.

That's a difference of $4,500!
$4,500 I would have paid to Uncle Sam is instead going into my retirement account!

*I will have to pay tax on this money someday but I will be in a lower tax bracket during retirement and a Roth 401k may be a better choice for some people.

 

[burrheadd]

Have you met Nancy?

 

[Ms.PacMan]

Have you met Nancy?

Yes. I'm just trying to help people understand their tax situations better. Rich people don't pay income tax because they don't owe any - they don't pay taxes because they take advantage of ways to decrease the amount they owe. I believe Trump called it being smart.

 

[burrheadd]

Yes. I'm just trying to help people understand their tax situations better. Rich people don't pay income tax because they don't owe any - they don't pay taxes because they take advantage of ways to decrease the amount they owe. I believe Trump called it being smart.

Well, carry on then

 

[Catatonic]

I contributed the max to 401k for the last 20 years of my employment at UPS ... that included the "catch-up" once I turned 50.
I'm enjoying it now in retirement.
It also helped us keep our expenses down during my employment.
The last 10 years, I sold UPS stock to make up the difference in take home pay.
It was 25% tax on income versus 18% on stock plus UPS stock wasn't doing much the last ten years.

 

[MC4YOU2]

Great info Ms Pac. I wish they taught this stuff to high school students too. It's a shame most people don't know how to manage their money, and even at UPS, a lot of us didn't find out about this and other advantages until we'd been at the job for years. Thanks for putting these examples together.

 

[Brownslave688]

Great info Ms Pac. I wish they taught this stuff to high school students too. It's a shame most people don't know how to manage their money, and even at UPS, a lot of us didn't find out about this and other advantages until we'd been at the job for years. Thanks for putting these examples together.

I wish they taught this stuff in school too but even more so I wish parents would talk to their kids. So many people are scared to death to talk money with their kids.

 

[Ms.PacMan]

My dad talked the talk about saving but didn't walk the walk and despite making an above avg. income my parents lived paycheck to paycheck. Payday meant eating out or take out followed by my mom shopping all weekend, bills, groceries. Hearing we don't have money the second week and then finally scrounging for money to buy a gallon of milk the day before payday - only to do it all over again. I hated it as a child.

I don't know if high schoolers would get a lot out of a finance class but just covering the basics of what to expect when you get a job would help (401k) along with a warning that the banks are not your friend and will lend you more money than you might be able to afford would help.

I talked to my child about money his whole life but even at 25 he thinks I have a fortune saved and doesn't quite get that it has to last my whole retirement which may include catastrophic illness or nursing home care.

 

[MC4YOU2]

The more sources of info they have, the better, that's for sure.

Some parents may not be very good wth their own money, let alone explaining how to manage it. And some kids think their parents are the dumbest people around.

Just imagine how much better it could be if basic investing and saving were required courses, instead of algebra or some high level science class that will never apply to 100% of the students.

Everyone should be taught real life compound interest situations before they get a credit card.

 

[Jones]

My mother was very smart about saving and investing which is good because my father wasn't. He was smart enough to leave the saving and investing to her, and she was smart enough to pass on her wisdom to her children.

 

[T-Dubya]

I wish they taught this stuff in school too but even more so I wish parents would talk to their kids. So many people are scared to death to talk money with their kids.

Why would anyone be afraid to talk about money with their kids?

 

[UpstateNYUPSer(Ret)]

Why would anyone be afraid to talk about money with their kids?

Perhaps they are afraid to reveal their own shortfalls.

 

[TearsInRain]

taking a personal finance class in high school changed my life

it's disgusting how few people understand compound interest

the biggest mistake i see people make though is trying to pay for their kids college; there isn't enough time between birth and freshman year for CI to do the heavy lifting, you'd be better off letting your kids figure it out themselves because by the time you retire you could literally pay them a ft salary with how much you'll be making on your investments anyways

 

[Babagounj]

Today most college grads are unable to balance their checkbooks .
Many have the mindset that upon graduation all student loans are forgiven .
They live in a swipe the card world . Where sometime in the future all things will work themselves out .