I'm 55, single and am not sure about having taxes taken out before or after my deductions. Right now I'm having taxes taken out before my deductions, believing this is the best way to go so I won't have to pay taxes later. Would i be better off not having the taxes taken out until I retire?
2007-06-05 15:32:46 · 5 answers · asked by black jack 2 in Business & Finance ➔ Taxes ➔ United States
Depends on the income bracket you are in at the moment.
The higher the income bracket your are in the bigger the tax bite. By deferring monies until retirement, chances are you income will not be as high ergo taxes will be lower.
At present you are paying FICA, Medicare, State & Federal taxes aand your 401k. In addition you are probably paying health insurance, dental and a flurry of other things that come out of your paycheck that, except for health, you would not be paying when you start utilizing the monies.
I would be willing to bet your taxes on the 401k monies would be less when you retire than now.
2007-06-05 15:51:00 · answer #1 · answered by Kris 3 · 0⤊ 0⤋
There is no definite answer. There are too many variables to consider.
If this is a regular 401k, then the contributions you put in with after-tax money make up the "basis" of your 401k and will not be taxed again when you take distributions. However, all of the earnings will be taxed at your regular tax rate. The earnings may be substantially more than your contributions. My point is that you are not avoiding future income taxes on all of your distributions by making after-tax contributions. If your tax bracket in retirement is going to be lower than it is now, your strategy makes no sense.
If your tax bracket in retirement is equal to or higher than it is now, then your approach makes sense. It also has the advantage of removing some of the distribution from your taxable income for purposes of computing the taxes you will pay on Social Security benefits.
If this is a Roth 401k, then you have designated your contributions as Roth, and all qualified distributions, including earnings, are going to be tax free. If this is what you are doing, it may be a great deal for you regardless of your current and retirement income tax brackets.
If you want to save for retirement and avoid taxes in retirement, and you do not have a Roth 401k at work, then in addition to the 401k, put $5,000 a year into a Roth IRA if you earn less than $99,000. If you earn more than that, put $5,000 a year into a nondeductible IRA and rollover the balance to a Roth IRA in 2010 when the income limits are removed.
2007-06-05 23:57:42 · answer #2 · answered by ninasgramma 7 · 1⤊ 0⤋
Federal tax law allows an employer to deduct health insurance payments from your gross earnings prior to taxes being assessed on your earnings. You won't be able to "deduct" your health insurance as an expense at tax time. The logic is that since you'd get a deduction for your health insurance anyway, Uncle Sam lets you get that deduction as you use it, which is when you buy your health insurance, each pay day. So.... You are right and he owes you, oh say, a dinner at Applebees or The Texas Roadhouse. You can give him a kiss and make him feel like he's special for having such a smart gal as his partner. Grinnnnnn.
2016-05-17 21:04:11 · answer #3 · answered by ? 3 · 0⤊ 0⤋
Not sure what you're asking. If you're contributing to a 401k, the money is being put in before tax. You'll pay tax when you withdraw from the 401K.
2007-06-05 15:45:43 · answer #4 · answered by Judy 7 · 0⤊ 1⤋
You don't have to pay any taxes on the 401K until you start taking money out, that's the whole point.
2007-06-05 15:37:33 · answer #5 · answered by vinster82 5 · 0⤊ 1⤋