A couple of years ago I had to pay additional tax - i.e. in addition to what was already being witheld by my employer. Since then I have been witholding and additonal sum by indicating it in my W4 and usually get a small refund back.
My question is, does it more sense to instead put more money in my 401K (I have not maxed out). Will the tax sheltered nature of this investment have the same benefit vis a vis taxes as the witholding through w4?
2006-12-01 08:04:07 · 5 answers · asked by Andy 1 in Business & Finance ➔ Taxes ➔ United States
You're comparing two different things. Withholding money on your W4 is really just making payments towards your eventual tax bill. Contributing it to your 401(k) is just making payments to your retirement plan. The tax benefit you get from contributing to your 401(k) is not a dollar-for-dollar deduction from your taxes. So if you increase your 401(k) and reduce your withholding, you will end up with more in your retirement account but you won't have an equal reduction in your overall tax bill.
2006-12-01 08:09:12 · answer #1 · answered by dcgirl 7 · 1⤊ 0⤋
If you add to the 401K you are putting in your money and also IRS money. The IRS money is the income tax you would have paid if you didn't contribute to the 401K.
Adding to retirement savings makes sense from two view points. 1. you are paying less tax now and and paying back the tax in future years. You are earning tax deferred income on the funds. 2. even if you are in the same or a higher tax bracket at retirement you will be paying the tax with inflated dollars. In other words if you can postpone paying a tax for ten or more years you will be paying the tax with dollars that are worth zero compared to the dollars you are saving today.
2006-12-01 09:14:27 · answer #2 · answered by waggy_33 6 · 0⤊ 1⤋
It's always better to put it into a retirement account first. That way you have less reportable income, so in effect you are earning money by the difference in the tax you'd be paying under the two methods - the difference between not putting it into the 401k and actually putting it in.
2006-12-01 08:15:38 · answer #3 · answered by Anonymous · 0⤊ 0⤋
By overpaying your taxes, you are giving the government an interest-free loan. As long as you're able to handle the cash payment to the IRS, you are much better off invesitng into 401K.
2006-12-01 08:09:55 · answer #4 · answered by shoelace 3 · 0⤊ 0⤋
Whenever you have the chance always put money in your 401K.
You'll thank me when you're an old man and can no longer work.
2006-12-01 08:08:29 · answer #5 · answered by Anonymous · 0⤊ 0⤋