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3 Ways Your 401(k) Benefits Your Taxes Like a Deduction
December 3, 2016
Your 401(k) retirement fund may not be tax deductible, but that doesn’t mean it can’t have an impact on your overall end of the year taxes. Contributing to your 401(k) is kind of like having the benefit of a tax deduction every payday.
Here are three ways your 401(k) impacts your end of year taxes:
It lowers your taxable income. Your 401(k) contributions come from pre-tax dollars, which means when you receive your W-2 at the end of the year, you’ll notice that your wages subject to federal income tax are lower than usual. While not a deduction in the true sense, it does help to alleviate the amount of taxes you pay overall by reducing your taxable income.
It helps you take home more money. Not only does contributing to your 401(k) reduce your taxable income, but it also reduces the amount of your income tax withholding. When the amount of your taxable income is lowered, your employer withholds less money for federal income taxes (your social security and Medicare taxes will stay the same regardless). This means you have more money in your take-home pay and you’re building a nice little nest egg for the future.
In some ways, it helps you save twice. Thanks to the Savers Tax Credit (officially known as the Retirement Savings Contribution Credit), you can actually benefit from an additional saving for contributing to your 401(k) if your adjusted gross income is under a certain limit. Income limits vary based on your filing status; however, the maximum credit available is $1,000 for singles or $2,000 for married couples.
As you can see, contributing to your 401(k) isn’t just an investment in your future, but it can also help your finances in the present as well.