| Minimizing Tax Through 401K Contribution Query |
|
|
|
|
|
BigWonton
Member
Cash: $ 2.44
Posts: 10
Joined: 08 Mar 2005
Location: New York
|
| Minimizing Tax Through 401K Contribution Query |
 |
|
Hello,
Just wondering if anyone out there knows the answer to this question...
I'm currently in the 25% tax bracket ($29,051-$70,350), I'm thinking of lowering my income by contributing just enough to my 401k account to meet the 15% ($7,151-$29,050) bracket, but I have other investment accounts (regular brokerage accounts). I'm wondering if capital gains from those accounts will count as income, therefore, exceeding the threshold limit, or is capital gain independent from income and will not affect qualification for the lower tax bracket?
Example, if my annual salary is $30,000 and I contribute $1,000 to my 401K account, lowering my income to $29,000, just enough to qualify me to be taxed at the lower 15% bracket instead of the 25%, but if I've made say, $2,000 from stock gains, am I still qualified for the 15% bracket, or do I now need to contribute more to my 401k in order to qualify?
Thanks in advance for any help in clearing this up!
|
Tue Mar 08, 2005 11:35 pm |
|
|
BlankenshipFP
Money Talk Advisor
Cash: $ 79.56
Posts: 390
Joined: 05 Oct 2004
Location: Illinois
|
Capital gains are taxed at a separate rate - but dividends are considered ordinary income. Your strategy should work just fine, as long as you consider any dividends or interest from other accounts as part of your AGI.
Hope this helps -
Jim Blankenship, CFP�, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
|
|
Wed Mar 09, 2005 1:40 pm |
|
|
BigWonton
Member
Cash: $ 2.44
Posts: 10
Joined: 08 Mar 2005
Location: New York
|
| Minimizing Tax Through 401K Contribution Query |
|
|
Thank you so much for your insight, I've been getting conflicting answers from co-workers and friends.
|
|
Thu Mar 10, 2005 4:38 pm |
|
|
domskynetlabs
Full Member
Cash: $ 21.09
Posts: 95
Joined: 24 Nov 2004
|
Can I do the same with Roth IRAs inplace of 401k
|
|
Fri Mar 11, 2005 6:04 pm |
|
|
BlankenshipFP
Money Talk Advisor
Cash: $ 79.56
Posts: 390
Joined: 05 Oct 2004
Location: Illinois
|
Sorry, a Roth contribution isn't deductible from income. A traditional (deductible) IRA would work.
Jim Blankenship, CFP�, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
|
|
Fri Mar 11, 2005 6:39 pm |
|
|
domskynetlabs
Full Member
Cash: $ 21.09
Posts: 95
Joined: 24 Nov 2004
|
but in my low income bracket a roth ira is still more benificial to me I hope
|
|
Fri Mar 11, 2005 7:49 pm |
|
|
BlankenshipFP
Money Talk Advisor
Cash: $ 79.56
Posts: 390
Joined: 05 Oct 2004
Location: Illinois
|
I would think so. Roth IRA is beneficial to most people in most tax brackets, due to the tax-free nature of the withdrawals.
Jim Blankenship, CFP�, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
|
|
Fri Mar 11, 2005 8:07 pm |
|
|
auggyf
Full Member
Cash: $ 19.90
Posts: 97
Joined: 24 Sep 2005
Location: San Francisco
|
Hi Wonton,
I think you might be confusing the concepts of MARGINAL and AVERAGE tax rates.
The "25%" bracket means you pay 25% on the money earned between that range. Figuring out how to just barely sqweak in the 15% bracket does not mean that your taxes will jump down suddenly. ie/ making $29,050.99 vs $29,051 will affect your tax liability by something less than a penny. Your average tax rate is about the same, but suddenly your marginal tax rate jumps.
Contributing to your 401k, though, is still more beneficial when you are in a higher tax bracket because the 401k contribution will reduce your taxes by more than it would have in the lower bracket.
Hope this makes sense
|
|
Sat Sep 24, 2005 11:12 pm |
|
|
|
