December 28, 2013
How does saving in a traditional 401(k), TSP, 457, 403(b) reduce your taxes owed in that year?
How does saving in a traditional 401(k), TSP, 457, 403(b) reduce your taxes owed in that year?
Contributions are taken from paycheck before taxation.
Contributions you make to your 401(k) plan can reduce your tax liability at the end of the year as well as your tax withholding each pay period. You receive the benefit of a tax deduction every time you make a contribution with pre-tax dollars.
Saving in a traditional 401(k), TSP, 457, 403(b) reduces your taxes owed in that year because money that you put into there essentially reduces your income for the year. By reducing your income for the year, you will owe less in taxes for that year.
Colby and Chris have this one correct. Let’s recap.
When you invest in your traditional retirement account at work (Roth versions do not apply as the money is invested after tax) your money goes in before tax.
Let’s say you invest $10,000 in your traditional 401(k) and you earn $50,000 per year gross (before taxes are withheld). Instead of being taxed at $50,000, you will only be taxed at $40,000.
This would include federal and state income taxes (if you pay state that is). You have reduced your taxes AND saved for your retirement needs. Win! Win! Start TODAY!