How you can save for retirement and move down a tax bracket
Now that we are in the midst of tax season, members of the Finance Collective are here to give you tips and tricks on how best to take care of yours taxes this year. This week's tidbit of advice comes from Super Millennial -- read below to see what he has to say!
"How can you save more money for retirement and end up in a lower tax bracket? It's actually easier than you think!
2016 was a big year for me financially. I learned more in one year than I had in the previous 28 and luckily my learning moments were not at the expense of losing money. Prior to 2016 I was focusing my retirement savings in my Roth IRA over my 401K. Why?
Because I had very little incentive. Unfortunately my employer only matches $1,000/year. Whether you contribute $1,000 or max out at $18,000 they only match a flat fee. Other employers do a percentage match, which usually means more money they will contribute. In the past I would typically contribute $1,000 and then direct my savings towards my Roth IRA. Once I maxed out my Roth IRA last year, which is $5,500 annually, I decided to increase my 401K contributions. Here's why:
It's automatic; a 401K will automatically be withdrawn for every paycheck without testing your will power of getting paid, transferring money to a brokerage account and choosing your investments.
It is not taxed yet so I can contribute more of my money and will be taxed in the future. The beauty of having both a 401K and a Roth IRA is that you have one account that's already been taxed and other that hasn't so your future retirement has already been partially taxed.
401K contributions are tax deductible. The amount invested will be deducted from your gross income.
Needless to say it worked out really well as I contributed over $10,000 towards my 401K. I would contribute anywhere from 5 – 20% depending on the upcoming paycheck as it varied by commissions. Not only did I save more I also am going to be in a lower tax bracket than 2015 even though I made more!
As I mentioned the 401K contributions are tax deductible so my gross, taxable income will be $10,000 less on my W-2. This will lower my tax bracket 3% and hopefully owe less (or nothing) to the government when I file my taxes. Stoked!" -Super Millennial
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