The Benefit Of The 401k Tax Deduction
The 401k account is an employer sponsored program that allows employees to place a predetermined amount of money to an account that is designed to provide for retirement. There are substantial tax benefits associated with 401k accounts. The initial benefit is that the money withdrawn for your 401k accounts is not taxed. This is especially beneficial for those who may have received a raise that pushes you into another tax bracket. If you have not maximized your 401k benefit, place the additional money to this cause and you will not be taxed on your new found fortune.
The Internal Revenue Service has several publications pertaining to tax deductions and 401 k retirement funds. A summary is found in Tax Topic 424 and publications 575 and 560. If you are self-employed, publication 17 may be your best resource. So what are the tax benefits of your 401k retirement plan?
Most plans allow an individual to invest 15% of the employee wages and many allow for an additional $4000 investment for employees that are 50 or older. Profits experienced by 401K programs are exempt from taxes. Unfortunately, losses can not be claimed. However, if y our 401k fund is left to go the way of the national average, losses should not be a problem
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Money from your 401k is only taxed when the funds are withdrawn. This is especially important to remember when you are transferring your fund from one trustee/plan to another. For tax purposes, make sure you always transfer your fund from one administrator to another. Keeping the investment in the name of a trustee will prevent the 20% early withdrawal tax. With regular examination and adjustment, your 401k account can provide a nice tax break now and a complete source of funding for retirement. Don't get complacent. Investment opportunities and taxation laws change regularly. Stay on top, and you will be enjoying your retirement on the tax free money you invested during your working years. |
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