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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10171
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I am trying to understand that if I add an additional lump

Customer Question

I am trying to understand that if I add an additional lump sum to my 401K plan through my employer how it will affect the amount of taxes I will pay when I file next year. In a general sense, unless this extra amount will bring be into a lower tax bracket as defined by the IRS, I am pretty much just getting back what I give now. My concern is not to build my 401K at this time, it's to lower taxable income. My income is in the middle of one of the brackets and would not end up in a lower bracket. Any thoughts?
Submitted: 12 months ago.
Category: Tax
Expert:  Lane replied 12 months ago.

Hi,

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First, I understand what you're saying ... but I Just can't help pointing out that from a purely financial point of view the 401(k) contribution is by far the most efficient way to lower the taxable income.

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Anything else you do is simply spending a dollar to save 25 cents (assuming a 25% bracket). With the 401(k) contribution you lower the taxable income by the amount contributed (but KEEP the dollar)

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Expert:  Lane replied 12 months ago.

Another issue is that unless you are the business owner and using a solo 401(k), the contributions have to be made as a salary deferral. You can't contribute a lump sum into an employee 401(k) account UNLESS you're talking about a rollover from an IRA or another plan (which, of course wouldn't generate any tax savings) OR a profit sharing contribution from your employer, which is a tax deduction for THEM and free money for you, but no lowering of taxable income for you there either

Expert:  Lane replied 12 months ago.

(you can CERTAINLY increase your salary deferral by an amount that wouldn't take you over the 18,000 salary deferral limit for 401(k)s for the rest of the year - not a lot of time left to DO that though)

Expert:  Lane replied 12 months ago.

But to answer the question specifically ... it, as you mention, just reduces your taxable income (and this does happen at the highest bracket, because the other income for the year is what it is)

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So if your taxable income is say 60,000 (squarely in the middle of the 25% bracket for a single filer ...$36,900 to $89,350 is at 25%)....

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.. then contributing say an additional 10,000 would lower your income to 50,000 (and at that 25% bracket that's $2,500 less tax you'll pay uncle Sam.

Expert:  Lane replied 12 months ago.

Does that help?

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Let me me know...

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I'll be here

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I hold a J.D. (a Juris Doctorate - a doctoral degree in the law, with taxation and corporate law concentration). I also have an MBA in Finance an Tax, as well as a BBA , And I have CFP and Chartered Retirement Plans specialist designations. ... so this is exactly the subject matter where I can help and enjoy discussing ... let me know if you have ANY questions at all.

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Lane

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