Should I contribute a modest amount into a traditional 401k to reduce taxes?

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Topic Author houchen

Joined August 8, 2024 3:45 pm.
Should I contribute a small amount to a traditional 401k to reduce tax burden?

Post by Houchen >> Tuesday September 3rd 2024 2:53pm.
Recently I owed taxes of $500 or less each year. However this year is different as I am set to contribute $23k towards my Roth 401k by year’s end, and will likely receive around 3% company match which amounts to roughly $3.7k (3%) or so from my employer match. Also this year I maxed out my Roth IRA contributions so perhaps there’s benefit in contributing some to a traditional 401k this year? Will contributing even $500 would reduce my tax bill and would it make more sense doing it this year or in future filing my taxes as Single?

Last edited by Houchen at Tue Sep 3, 2024 3:39 PM, 1 time edited total. Firstly it should read as “Hyperchicken”. Upon further examination it turns out it has an extra line referring to Hyperchicken which means more is to come!

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Reducing my tax burden should I contribute small amount to traditional 401K? (Post #292363)
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What is Your Marginal Tax Rate? You might benefit from switching your Roth 401(k) contributions over to traditional, as it could reduce tax liabilities or withholding amounts by $500 owed after withholdings are taken off; Roth/traditional choice should have no bearing here. You are earning $120k annually thanks to your 3% match and filing single, placing the top of your income into 24% bracket – so switching all 401(k) contributions from Roth to traditional is recommended due to incomplete data provided – however more information might give better advice on this decision making decision.

Hyperchicken edited this thread once on Tue Sep 3, 2024 3:52 pm. Wed Feb 21 2018 2:17pm Joined and posted: 10868 times
Re: Should I invest a small sum into traditional 401k to reduce tax burden?
By 02nz on September 3, 2024 at 3:50 PM.
Sounds like your income is around $123,000; as a single filer that puts you into the 24% tax bracket. I recommend investing all or mostly traditional in your 401k in order to save yourself this 24% federal income tax (and 22% below that) burden in future years; one possible exception might be rapid income growth that puts you into higher brackets sooner rather than later.

Topic Author houchen

Joined Aug 8, 2024 3:45 pm.
Re: Should I contribute a small amount to a traditional 401k in order to reduce tax burden

Post by Houchen on Tuesday September 3rd 2024. 357 pm.
Are You Needing Your Roth or Traditional Contributions Converted Now? Once again, depending on what your marginal tax rate is and your tax liability (ie: after withholdings are deducted), changing Roth contributions into traditional may make more financial sense than staying Roth/traditional for contributing purposes.

Assuming my income tax liability will likely remain unchanged at 24% in 2023 with 7.65% in FICA tax liability being absent; no state income taxes. Due to two raises this year my total percentage may change but likely still will fall somewhere within that range; I made $110k then and currently my current annualized salary after increases is $128k which was likely my 2023 total salary as the extra $500 is likely withholdings and not necessarily tax liability.

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Re: Should I contribute small amount to traditional 401k to reduce tax burden | Harmanic >> Tue Sep 3, 2024 4:02 pm Houchen wrote in on Tue September 3 at 3:57pm |
Hyperchicken wrote:
What is Your Marginal Tax Rate? It could be beneficial for you to switch from Roth contributions to traditional ones for your 401(k). Is $500 your tax liability, or just the total owed after withholdings have been deducted? Roth/traditional choice has nothing to do with either option being best or worst in practice.

Assuming my tax bracket remains flat in 2023 at 24% with 7.65% FICA contributions and no state income taxes due, in 2024 my total withholding would have likely been 24%; since I received two raises and don’t know my total yet (although likely 24%); when making $110k back then and $128k today after recent raises my withholding is likely 24% and therefore could possibly include $500 withholding or just be seen as tax liabilities owing.

If all that’s on your mind is to avoid an outstanding tax liability of $500 next year, simply increase the withholding from each paycheck by that amount.

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Re: Contributing a small amount of my paycheck into a traditional 401k in order to reduce tax burden [Stephanie Houchen >> Tue Sep 3, 2024 4:12 pm
02nz wrote: |It appears you have around $123K of income for single filers; that lands you in the 24% federal income tax bracket and 22% below it (single filers will likely fall further below). With that being said, traditional-oriented 401k investments would likely provide greater tax efficiency; any exception may arise in cases of rapid income growth which might place you into more stringent tax brackets over time.

My salary in 2023 was approximately $110k; after several raises it has reached around $128,000 this year and my marginal tax rate will likely remain 24% for both years.
Are there any books/literature on Roth contributions where I can gain more of an understanding when to contribute versus when not to? Rather than saying: “low income = go Roth”, which could potentially confuse matters further.

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Re: Should I contribute small amounts to traditional 401k accounts to reduce tax burden and save taxes for retirement, or not? Post by Nate79 on September 3, 2024 (4:37 pm).
If you owed taxes when filing, switching to a traditional 401k won’t affect it since your employer won’t withhold tax for contributions made via it anyways. Make an estimated payment or simply increase withholdings accordingly; perhaps savings account interest, dividends, or capital gains contributed?

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Re: Should I Contribute a Small Amount to my Traditional 401k to Reduce Tax Burden and Benefit from Growth on Wednesday 2024 Sep 3 5 PM Its mhadden1 wrote in at Tue Sep 3, 2024 at 5 PM with her response that an even smaller contribution may help alleviate tax liabilities for you (at 4:02pm on Tuesday Sep 3)
02nz wrote:
Sounds like your annual income is around $123,000 for single filers – that puts you into the 24% tax bracket, so I recommend going all or mostly traditional for your 401k investments to save yourself the 24% federal and 22% below taxes; one exception could be expected rapid income growth that puts you into higher brackets in future years.

Very closely. In 2023 my salary was around $110k; with some modest raises it is currently $128k; my marginal tax rate at 24% will likely remain similar this year.
Are there any good texts/literature on Roth contributions that explain when and why to invest? Rather than the simplistic advice that “low income individuals should go Roth”, which tends to lead to confusion about when or whether to fund one.

Bogleheads has an in-depth discussion about traditional and Roth contributions on its Wiki; your tax situation fits within that spectrum, so deferring taxes through your 401k is likely beneficial as it allows a lower withdrawal tax rate at retirement time. I imagine many, or perhaps most people, lack sufficient understanding about tax matters; brush up by studying available online resources like this forum! It will do you no harm either way.

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Posts: 7 Joined on August 8, 2024 3:45pm.
Re: Should I contribute a small amount to a traditional 401k to reduce tax burden

Post by Houchen on August 3, 2024 7:43 pm, in response to comments by Mhadden1 who posted at 5pm and Houchen who posted 4 hours and two minutes earlier (Tuesday September 3rd from 4:02pm onward).
02nz wrote: Based on your income of around $123,000 per year and as an individual filer this puts you into the 24% federal income tax bracket (and 22% below), I recommend going all or mostly traditional for your 401k investments to minimize taxes (both federal and 22% subtotals) when investing for retirement in this case; with one possible exception being rapid income growth which would push into more costly tax brackets over time.

My salary in 2023 was around $110k; after some raises this year it has reached $128,000 and my marginal tax rate remains 24% – so no change there.
Where can I find good literature that provides more clarity into when to contribute to a Roth and when not to? Instead of following advice such as, “low income = Roth contribution”,

Bogleheads wiki hosts an in-depth discussion about “Traditional vs Roth”. Assuming you qualify, deferring 24%-rate taxes with your 401k contributions until retirement with lower withdrawal rates would be advantageous in this instance. Unfortunately, however, most (perhaps all?) people lack sufficient understanding about their tax situations to fully benefit. It would do you great good to educate yourself further – there are numerous resources online; I am confident a forum may assist.

I know I need to learn more, so will start exploring it via the BogleHeads Wiki and post more questions here.

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Re: Should I contribute small amount to traditional 401k to reduce tax burden? By Physics911 > Tue Sep 3 2024 8:37pm.
At your income level, having an outstanding tax liability of around $500 should be ideal. While I understand trying to get it closer to $0 may seem ideal, keep this in mind: every refund means giving the government an interest-free loan for that sum owed back by you; an over-shot by even just one dollar could mean better investments going towards building your future instead.

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Re: Reducing Tax Burden by Contributing Small Amount to Traditional 401k? For Post, go here
By nostresshere >> Wednesday September 4th 2024 2:57pm.
Please don’t say you paid only $500 in income tax – my guess would be more like $10,000+ and thinking otherwise is just untrue; more likely your witholding vs. actual taxes due in April was off by $500 and this led you to believe you paid only that. Many Americans think otherwise – especially if they get back $700 as refund – thinking they have actually received some sort of windfall; even if that difference were only by $50 it should still count towards being accurate in reporting taxes paid or due – that makes this statement even less relevant; most Americans probably think more accurate reports would show what owe on what taxes due compared with actual due in April rather than giving false impression of paying $500 income taxes due. If that number were off just once then congratulations you – that means there should have been only marginal deviation of $100 then.

Topic Author houchen

Posts: 7 Joined on August 8, 2024 between 3:45 pm and 4:00 pm.
Re: Contributing a small amount to my traditional 401k in order to reduce tax burden = Post by Houchen >> Thu Sep 5, 2024 7:48 am
NO Stresshere wrote: PLEASE, Please don’t say you paid only $500 in income tax! My guess would be closer to $10,000+ as paying $500 seems worthless; more likely withholding was reduced and actual taxes due were short by that amount in April; most Americans think like this; it makes sense; especially when given back money like $700 they feel as though this represents some form of windfall! Even if it were only to the tune of 500 off that would still count.

My income tax payment totaled $500. When asked whether that sum included my additional bill of $500 I said no; thus implying it may still owe.

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Re: Contribute a Small Amount to My Traditional 401K to Decrease Tax Burden Its This topic was created and has since been edited. As previously posted by LotsaGray and Houchen: |Thu Sep 5 2024 748 pm (Central).
Nostresshere wrote:
Please, PLEASE don’t say you paid $500 income tax! More likely it was $10,000+; thinking you paid that is an inaccurate statement and likely means witholding reduced the actual taxes due in April by 500 dollars from witholdings vs actual due. Most Americans think in these terms, which makes sense; most would view a refund of $700 as being some form of financial windfall! Even so – that should count as progress since even being off by that amount counts as better news! Nostresshere wrote: |Wed Sep 4 2024 257 pm
PLEASE don’t say that! that means at least this time. If that much error existed that makes this outcome very positive indeed compared with what would normally occur

My statement implies an additional tax payment of $500; therefore I owed this sum.

What you said in reality was: I don’t know whether my $500 is due to withholdings or taxes due, I assume it must be my tax liability.” In truth, your true tax obligation probably totaled $10K or so and thus your $500 represents that portion not covered by withheld payment of $9500 from employer.