Tax Benefits of Your 401k

Though benefits of saving for retirement may seem years away, there are some shorter-term positives that could have you doing a happy dance.

Saving money for your retirement has obvious long-term benefits. You’ve probably been lectured ad nauseum about how saving today will help your future self, and, while you may tire of hearing the message, it does make sense. Depending on how you view your time in retirement, it may mean not going to a full-time job, thus, not receiving a full-time paycheck. So the money you save today in your workplace retirement account will be there for you to use and to live on in those wonderful golden years. Super.

But, focusing on something that seems like it won’t come around for eons is frustrating. In the wise words of Janet Jackson, ‘What have you done for me lately?

I’m not trying to take away from the obvious long-term retirement savings benefits of being able to eat, have shelter and, hopefully, do things to enjoy those years in retirement. Those things are great. But there are also some possibly not-so-obvious nearer-term positives to retirement saving that should get you on your feet and boogying to the beat of the 401k contribution sound today. (Okay, I’ve been told that ‘401k contribution’ is not a musical genre, but it just felt right.) What I’m trying to say is that you don’t have to wait decades to reap the benefits of retirement contributions. There are some benefits to enjoy in the short term.

 

Pre-tax Contributions

Using an employer-sponsored retirement plan, like a 401k, to save for your retirement may allow you to take advantage of something called pre-tax contributions. Why is this a good thing? Pre-tax contributions are pulled out of your paycheck before Uncle Sam gets his income tax share, which may lower the amount of your wages in which you are subject to federal and state income tax. Depending on your situation, that may equate to paying less income taxes. [Sweet dance move here] In 2019, 401k contributions are deductible up to $19,000. If you’re age 50 or older you can add an additional $6,000 to that number for a total of $25,000 in deductible contributions. (If you’re contributing to a Roth 401k, it has different tax implications you’ll want to check out.)

 

Tax Deferred

Another advantage – postponing the taxes paid on any earnings in your retirement account. If you have a regular taxable investment account or a savings account, every year when you do your taxes you have to include any interest you’ve earned that tax year from those accounts. With your workplace retirement account it’s considered ‘tax deferred,’ meaning, you don’t pay taxes on the earnings until you take the money out of the account.

 

Retirement Saver’s Credit

And ANOTHER advantage – the Saver’s Credit. Depending on your adjusted gross income, you may be eligible to take a tax credit for your contributions to either a workplace retirement account or an Individual Retirement Account (IRA). To see if you’re eligible for this additional tax credit check out the IRS site for more information.

So while the long-term benefits of retirement savings may get all of the love (and the lectures), there are additional benefits that you can enjoy in the moment. So get out your dancing shoes and cut a rug in honor of those contributions. You’ve earned it!

 

 

Blooom does not provide tax advice. Consult a tax expert for tax-specific questions and to determine how retirement contributions may affect your personal situation.

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