It’s that glorious time of year again: Tax Time!
There’s not a lot you can do… BUT did you know that the best time to start planning for your taxes isn’t in December? It is now.
If you find yourself in either of these scenarios, here are some actions you may want to consider:
If you are getting a refund from the IRS
Number one, call your HR Department to adjust your W-4 form and raise the allowances you are claiming. This will increase the amount you get on your paycheck (after they get done taxing it).
Number two, raise the amount you are saving into your 401k. Once you do this, your after-tax paycheck will likely go back down to what it “used to be.” You may have to fiddle with the W-4 allowances and 401k savings rate to get the numbers to shake-out. Once you’ve done this, you could save more money into your 401k, pay less in taxes, and your after-tax paycheck should still be about the same! Boom! Painless saving. Granted, you’ll stop getting a refund each year (which is nothing more than an interest-free loan to the government,) but your future retirement thanks you in advance!
If you owe money to the IRS
You have some options as well. By simply raising your retirement account contributions, you can reduce your overall taxable income. If you are eligible to contribute to a traditional IRA, all or a portion of those contributions may be deductible, meaning they can reduce your taxable income for the year. Another option would be to contribute to an HSA, if you’re eligible.
Both of these options involve saving more money into your 401k, and some of you might wonder what a 1% difference in 401k savings can make over 25 years. Well, take a look for yourself:
If a 33-year-old with a $50,000 salary can save an additional $42 a month (~1% annually), that little bit of extra savings could translate into roughly an additional $500 of monthly income in *retirement.
$42 a month! (that wasn’t a typo)
We can all squeeze out an extra $42 a month, and you can probably do it with dollars you’d otherwise give to Uncle Sam via taxes.
So get to it! Save more money and we’ll continue to make sure it’s invested correctly!
*This assumes our 33-year-old works until she is 70, and earns a 8% annual return, with 3% annual inflation adjustments.
The information is provided for discussion purposes only and should not be considered as investment advice. Blooom does not provide tax advice. Consult a tax expert for tax-specific questions.
Published on April 15, 2021