No articles found to show on this page.
By contributing to your traditional 401(K) plan, you can save on taxes today and invest in your retirement at the same time.
With President Trump’s tax proposals taking aim at many deductions now used by Americans to lower their tax bills, the 401(k) retirement account is re-emerging as a go-to vehicle to shield one’s earnings from the IRS.
The IRS said last week it is upping the maximum 401(k) contribution for 2018 by $500 to $18,500. Americans 50 or older will again be able to stash away an additional $6,000.
That makes the 401(k) an even better tax shelter than it already was. 401(k) plans allow workers to save money for retirement on a pre-tax basis, which lowers their taxable income.
On Monday, President Trump, in a tweet, quashed rumors that the 401(k) maximum contribution limit might be reduced as a way to offset lost government revenue caused by proposed tax cuts.
“There will be NO change to your 401(k),” Trump tweeted. “This has always been a great and popular middle class tax break that works, and it stays!”
More: 5 IRS tax benefit adjustments you’ll want to know about in 2018
More: 401(k)s: Why a Millennial avoids them, keeps savings in trading accounts instead
More: Black Monday: Can a 1987-style stock market crash happen again?
Trump’s tweet is good news for savers and taxpayers.
The reason? Many other tax deductions are on the chopping block.
The president’s tax proposal, for example would eliminate the state and local tax deduction. That proposed change would hurt people living in states with high taxes. These people relied on the tax break to lower their taxable income by itemizing deductions on their tax return rather than taking the smaller standard deduction.
And while Trump’s proposal leaves the mortgage interest deduction intact, fewer homeowners likely will use it because the president’s plan would also double taxpayer’s standard deduction — or the amount that’s subtracted from incomes before the tax rate is applied. The standard deduction, under the president’s proposed plan, will rise from $6,350 to $12,000 for individual filers and from $12,700 to $24,000 for married couples.
So how can your 401(k) save you on taxes?
By maxing out pre-tax 401(k) savings at $18,500 next year, a dual-income married couple can reduce their taxable income by $37,000. At the 25% tax bracket, one of three proposed by Trump, that equates to a rough estimate of $9,250 in tax savings. 401(k) investors, of course, will have to pay taxes when they start withdrawing their 401(k) savings at retirement.
The bottom line: the more you save in your 401(k), the more you save on your taxes.
If there’s a way for families to max out their 401(k)s without breaking the budget, now’s the time to do it.
On the 30th anniversary of the 1987 stock market crash, U.S. stocks are at a record high and investors are concerned that steep valuations may mean a correction is overdue.
Video provided by Reuters