Source
r/personalfinance•
tinywayne

Calculator to suggest 401k contribution amount to reduce taxable income and lower my tax bracket and total fed income tax?

Retirement

I just watched a good video someone posted about marginal tax and tax brackets so I think this is making more sense to me now, but is it a legitimate idea to try and use pre tax retirement savings to reduce total taxable income? If salaried at 90k I’d be about 6k over the 84k tax bracket threshold... in my mind, if I put in 6k to my 401k, then I’d reduce my total tax rate from the 90k rate to the <84k rate ... but that now seems to feel wrong in the context of marginal rates. I guess just looking for some validation or confirmation or information here.

Posted Jun 13, 2020, 8:36 PM UTC

15
Toe_The_Line​•

Yes, 401k contributions reduce your taxable income.

But crossing a tax bracket threshold is not of any particular importance.

If you were $20k above the next lower threshold, and contributed $19.5k to your 401k, you would still get a substantial amount of tax savings. In fact, you would have more savings than if you were $10k over the threshold, and contributed the same amount.

4
jekewa​•

Nope, you've got it right.

Whatever contribution you make adjusts your income. If that adjustment lowers your assisted income below that income bar, you same on the taxes. If you set that money aside in the right kinds of accounts, the rest of your tax calcifications are done with the remaining income. Same as with some other deductions.

You're a little wrong, or maybe unclear here, about the tax brackets. No tax tables before me, so we'll use your numbers, and just conversational fluffy numbers.

All of the income below that $84K amount is already taxed as much as it can be (itemizations notwithstanding). If that's where s tax boundary exists, the income earned above that is taxed at a new rate. So, the $6K extra you're looking at its the only money taxed at the extra rate.

The tax rates are tiered, so income in the ranges is taxed at its rate. The first few thousand isn't taxed. The next range is at 10% (or whatever) and the next range is taxed at 15% (or whatever). Earning a dollar in the next range impacts only that dollar, not the previous dollars.

Of course, there are potentially other impacts, like earning over an amount may cause the loss of some credits, or require additional payments.

All of that said, you should also be saving for retirement. Better to set some aside and save on taxes, too, than just understand and pay more taxes.

3
ricksebak​•

Don’t forget the standard deduction of 12k (single), so if salaried at 90k then your taxable income would already be below 84k (it would be 78k).

But you’re not wrong that 401k contributions do reduce taxable income.

2
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1
DeluxeXL​•

Any amount you contribute to traditional 401k will reduce your adjusted gross income. If you contribute $6k, your AGI reduces by exactly $6k.

Remember, taxable income is AGI minus standard/itemized deduction.

  • You could save ($6k x marginal tax rate) exactly

  • Or you could save ($A x marginal tax rate + ($6k - $A) x next lower tax rate), if your taxable income is only $A into the current marginal tax bracket

1
[deleted]•

[deleted]

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