You are probably already familiar with the benefits of a 401(k) for retirement planning. But did you know that using this type of account can also help you save on your taxes? In fact, there are multiple tax benefits to taking advantage of the 401(k). Read on to learn about some major ways to save on Tax Day.
401(k) Tax Credits
That’s right: you can actually get a tax credit just for contributing to your 401(k). The Retirement Savings Contribution Tax Credit, also known as the Saver’s Credit, is intended to ease tax burdens for workers with moderate or modest incomes. But if you meet the eligibility requirements, you can receive a credit up to $2,000. Married couples filing jointly may benefit even more, as their maximum credit is $4,000.
401(k) Contributions Can Lower Your Tax Bracket
Whether you are using a traditional 401(k) or the Solo 401(k), any pre-tax contributions you make are automatically going to lower your tax liability. How does this work? In simple terms, the contributed funds are being pulled from your paycheck before you even receive it. You’re already receiving less on your paycheck, but this is actually an advantage when Tax Season comes. The IRS essentially acknowledges the loss you take from these withholdings. They’re counting the money you actually receive, meaning your taxable income is lower. Thus, your tax obligations are also lower.
Smart investors in any tax bracket can take advantage of the rewards of making pre-tax contributions. Larger contributions lower your taxable income further. This means, if you contribute enough to the account, you can potentially lower your tax bracket–and enjoy massive savings on your taxes.
Roth 401(k)s Save You Money in The Long Run
There are many reasons to love a Roth 401(k). Roth retirement accounts in general come with many benefits, namely that contributions to the account are tax-free. Distributions won’t be taxed when you take them, either. You can also take advantage of strategically timing your Roth contributions to relieve tax obligations.
Using a Roth 401(k) offers a multitude of exclusive benefits in both the short and long term. If you are having a low income year, are early on in your career, or expect to retire in a higher tax bracket than your current one, the Roth 401(k) is seriously worth considering. Check out our previous educational article to help determine if converting your 401(k) to a Roth plan is right for you.
Royal Legal Solutions Helps Our Clients Use 401(k)s to Save on Taxes
Retirement accounts can be intimidating, even for seasoned investors. Since we all must take accurate tax filing seriously to avoid penalties, savvy investors choose to get some help from the pros. The tax and retirement professionals at Royal Legal Solutions can help you get the most savings possible out of your 401(k). We offer a variety of retirement planning services to ensure you are using the correct types of accounts for your circumstances. And, of course, we can advise you on how to get the most tax benefits out of your retirement account.