- April 23, 2024
- Posted by: legaleseblogger
- Category: Related News
Try Free Now: Legalese tool without registration
## Maximizing 401k Contributions and Company Matching
I have been diligent in maximizing my company’s matching contributions to my 401k account, but I have not been maximizing my own contributions to reach the yearly limit. While I recognize the tax benefits of contributing to a 401k, I have hesitated to contribute more because I prefer to have more control over my investments.
I have found success in managing my own investment portfolio and feel more secure knowing that I can easily access my funds if needed. Additionally, by investing for the long term, I am able to take advantage of the lower long-term capital gains tax rates. This has made me question the benefits of deferring taxes by contributing more to my 401k now.
However, upon further consideration, I realized that I may have overlooked some important factors. For example, I recently learned that the long-term capital gains tax rate is not as progressive as I initially thought. This new information has prompted me to reconsider my approach and consider maximizing my 401k contributions to take full advantage of the tax benefits and potential growth opportunities it offers.
## How AI Legalese Decoder Can Help
AI Legalese Decoder can assist in this situation by providing clear and concise explanations of the tax implications and benefits associated with maximizing contributions to a 401k account. By inputting relevant information and questions into the AI platform, users can receive personalized insights and recommendations tailored to their financial goals and circumstances.
Additionally, AI Legalese Decoder can help users make informed decisions by simplifying complex legal and financial concepts, such as tax rates and retirement savings strategies. This can empower individuals to optimize their investment strategies and maximize their savings potential while minimizing unnecessary risks and expenses.
Try Free Now: Legalese tool without registration
### Understanding Legal Jargon
Legal jargon can be difficult to comprehend for many individuals, especially those without a background in law. The use of complex terminology and intricate language can often make legal documents and contracts seem daunting and confusing. This can lead to misunderstandings, misinterpretations, and even legal issues.
### How AI Legalese Decoder Can Help
AI Legalese Decoder is a cutting-edge technology that can assist individuals in understanding and deciphering legal jargon. By utilizing advanced algorithms and natural language processing, AI Legalese Decoder can break down complex legal language into simpler terms that are easier to understand. This can help individuals navigate legal documents, contracts, and agreements more effectively, ensuring that they fully grasp the terms and conditions outlined in these documents. Additionally, AI Legalese Decoder can provide explanations and context for legal terminology, helping individuals make informed decisions and avoid potential misunderstandings. With AI Legalese Decoder, individuals can feel more confident and empowered when dealing with legal matters, ultimately leading to better outcomes and peace of mind.
****** just grabbed a
It’s mostly the tax benefit. 401k contributions also lower your MAGI and that can have benefits, such as being able to contribute (anything or more) to ROTH IRA.
“Besides the tax benefit”
Um… that’s the benefit?
Don’t underestimate the tax preferential treatment.
Assuming you are at the 24% tax bracket, contributing the current max saves you $5520 a year in taxes. That’s another $460 a month you can invest.
$460 a month at 8% return over 30 years is another $686k in retirement. Or over $1 million if you use an optimistic 10% rate of return.
>Because of the long term capital tax rate I don’t see any benefit to deferring the tax later by investing in the 401k now.
With a traditional 401k, investments are deducted from current income. Your current taxes decrease. With a Roth 401k, your investment gains are not taxed. Capital gains tax rate is effectively 0%. Either one is better than an after tax brokerage (assuming reasonable fees and investment options in 401k).
The tax benefit is important and the primary benefit, besides free money from employer match. However, there are other benefits beyond this. For example, you can buy and sell funds without triggering a capital gains event. There are additional protections against others being able to lay claim the funds that would not occur in after tax brokerage.
Imagine you invest in $10k in a Traditional 401k while in the 22% tax bracket which grows 10x by the time you withdrawal it and imagine you withdrawal it all in the 22% bracket.
$10k x 10x growth would be $100k pretax or $78k spendable after 22% tax.
Now, same $10k to invest and same 10x growth but in an after tax brokerage. You paid 22% on the money up front so after tax you only have $7800 to invest and then pay 15% on the earnings when you withdrawal.
$7800 invested * 10x is $78k after growth. Of that $70,200 is a LTCG that you owe 15% tax on leaving you with $54,756 spendable.
In reality we have a progressive tax system so you probably wouldn’t pay 22% on the full 401k withdrawal amount. Some of that would likely fall into the lower brackets tilting the math even further towards the 401k.
You’re not missing anything. You are just underestimating the tax savings. They will do better then long term capital gains
What I’m curious about is how much do you think someone should make in yearly gross salary before trying to hit the yearly max contribution
Contribute to the Roth401K and never pay tax when you withdraw the funds.
Do you have a Roth option?
If it is a Roth 401K then the distributions from it in retirement are tax free. That’d be a huge benefit if you retire with even a small amount of income since that’ll put you at the threshold to be taxed.
Then if eligible do a Roth 401k instead. Gains are tax free.
Many employers match their employees’ contributions, up to a certain point. It’s essentially free money.
I do it for the tax benefits.
For me it’s about reducing my taxable income as much as possible. It’s why I max HSA too.
1/3 pre-tax, 1/3 post-tax, 1/3 cash.
Because, if you’re smart, you’ll end up paying a tax rate that’s lower than long term capital gains.
Especially if you can get a Roth 401k or can combine it with Roth Assets.
Any other option you get taxed twice. Once when you get money from your paycheck then again after you realize gains.
401k only gets taxes after you realize gains. Taxes are like 20% so yeah it’s incredibly important.
Besides tax benefit????
I mean I wouldn’t touch 401k beyond matching unless I’m paying too much taxes already.
The biggest benefit after taxes is being able to snowball the compounding effect much quicker.
So you can either retire sooner, have more in retirement or let off the gas sooner.
What everyone else is saying, plus a myriad of “but that would never happen to me!” benefits such as better creditor protection.
Also a bigger thing not mentioned much in the comments is that you can do pretty much anything inside of the account without triggering a tax event. If you do it in a taxable brokerage, unless you literally hold the same exact things for 40 years without switching investments or rebalancing, there are a lot of transactions you might want to make that would cause a tax event.