This is my first year of having a 401K. How does having a 401K affect my refund?

Answer 1

For most people, it doesn't.

For people making low to middle income wages, there is an additional tax credit for contributing to retirement accounts. The credit goes down based on income, but there is a credit for individuals with an AGI up to $25K and for couples with an AGI of less than $50K. I couild be wrong in the numbers, but that is the best of my recollection.

I believe everyone has the option of contributing to a 401K on a pre-tax basis. This will have pretty much no effect on your return. The benefit of making pre-tax contributions is that you will pay taxes on the money when you retire. Most people are in a much lower tax bracket when they are on a limited income after retirement than when they are making lots of money in their prime.

Answer 2

A 401K doesn't affect your actual refund, but since you put money in it that is tax free (at this point) it gets removed from your taxable income so your tax base will go down and hence the amount of taxes you pay will be less.

Remember that getting a big refund is not really a great thing (unless you are spending and then it works as sort of a no interest savings account)! It is your money that the government holds onto and doesn't give you any interest on it. You can't count it as an asset (which you can barrow against) because you can't prove you have it.

It is much better to figure out the right amount to have taken out each week and then have the rest deposited into a savings account so you can get it when you need it, not 2 weeks after you file your taxes.

Answer 3

It has minimal impact on your refund on a year to year basis. As others have said before..the 401k contribution (called a deferral) that you make is done on a pre-tax basis. Thus, it lowers your taxable income by that amount. You might think that would increase your refund but because your taxable income is lower your company also lowered the withholding that you made. That withholding is based upon your taxable income and the number of dependents you claimed on your w-4.

Bottom line is that deferring into a 401k lowers your taxable income, lowers your tax, and gives you a retirement account...but it has minimal impact on your actual refund. Changing your dependents has more of an impact. But, remember that by doing that you are simply shifting your pay from a biweekly (or whatever) to an annual thing as you are simply getting back money that was withheld from your paycheck. Not a smart thing to do...

Answer 4

Well the short answer would be it doesn't really although it can make your refund larger than you would have gotten if you had not deferred wages into the plan. The money that you contributed comes out "pre-tax" so you are only taxed ont he amount of your wages AFTER the 401(k) deferrals have come out.

Lets say you made 20,000 last year and you deferred 2,000 into your 401(k) plan. You would only be taxed as having 18,000 of income rather than 20,000. So you could possibly get a larger tax refund than you would if you were being taxed on the whole amount.

If you take a distribution from your 401(k) plan it will definitely make a difference because you will get taxed on the amount of your distribution plus a 10% penalty if you are under age 59 1/2.

Hope that helps....

Answer 5

It makes it look like you earn less money then you did, then the Government takes less out in taxes. You will get a larger refund because you were having too much withheld from your paycheck. It is a great way to keep the tax man at bay at least until you retire. Make sure you at least contribute at least to the company match, else you are just throwing money away.

Answer 6

"I just found out I've had a 401k for over a year." what does that mean? if you never contributed any money to it - it means nothing - contributions are already reflected in your W-2 and nothing is taxable unless you withdraw money for a retirement acct how did you NOT notice the contributions coming out of your paycheck for an entire year?

Answer 7

the 401 is taken out of your paycheck BEFORE any taxes hit. Therefore your tax base will lower thus potetionally making you elibible for a bigger refund.

Answer 8

NO EFFECT ON YOU TAX REFUND FOR 2006...BECAUSE THAT MONEY IS PROTECTED UNDER THE LAW UNTIL YOU CASH IT OUT....I HOPE you understand...thanks for your question..BASICALLY IT IS FOR YOUR RETIREMENT...