Your 401(k) can also lower your tax bill

This is the time of year when many Americans are writing checks to the Internal Revenue Service, which levies a tax on many forms of income, including wages and salary. Contributing to a 401(k) lowers the amount you pay in federal income taxes. Whatever amount you decide to contribute ($1-$9 per hour for individuals under 50, $1-$12 per hour if you are 50 or older) gets subtracted from wages before income tax is calculated. With fewer dollars reported as income, your federal income tax will be lower.

How much lower? Follow this link for a Tax Calculator courtesy of moneychimp.com. Next to the line for Adjustments: contributions to deductible retirement accounts, enter an annual 401(k) contribution as follows:

  • Enter $18,500 if you under the age of 50. This is the maximum annual contribution and amounts to $9 per hour if you are working full time.
  • Enter $24,500 if you are age 50 or older. This is the maximum annual contribution and amounts to $12 per hour if you are working full time.
  • If you want to enter a different annual 401(k) contribution, just be sure to multiply the hourly amount by 2,000, which is the average number of hours for a full-time carpenter.

With a 401(k), the portion of wages going into the account is not taxed as income—not initially, anyway. You pay the income tax later when you draw money from the account as a retiree, when you are likely in a lower income bracket. This allows you to accumulate money more aggressively through compounding interest and get the biggest bang from positive investment performance. Investment gains are tax deferred as well.

Based on current tax law, you’re not required to a take a distribution until you are 70½ years of age. If you’re in the early stage of your career,a 401(k) can offer 30, 40, or 50 years tax-deferred growth before you withdraw your first dollar from the account.

Eligible participants can start making 401(k) contributions any time during the calendar year. If you’re already enrolled, you can change your contribution amount up to two times per year. It takes about a minute if you use the online form on our website: www.ctww.org/401k