I made an extraordinary thing today, I spent some time reviewing my 2007 finances, something I usually don’t do until it is too late and I have to file the tax return. :-(
A couple of changes happened this year that affected our family financially. My wife was certified as a Montessori teacher and got a pay raise. Also some revenue started to trickle in from the ads I have on this blog which resulted in extra income. This is good but it also means that very likely we will have to pay more taxes this year.
Giving money to the government is not something I like doing very much, especially considering where a lot of it goes, so I started to look for a quick fix and it is very good that I did so today because come the end of the year and there would probably be very little that I could do.
I examined my 401K account and as of today I contributed around $8,400 by saving $800 a month. These are pretax savings which means that for each $1000 depending on your tax bracket you get around $200-300 back from Uncle Sam in a form of tax refund.
If I continue at the current rate, by the end of the year I will have $9,600. This is $5,900 short of the IRS limit of $15,500 set for 2007. If I don’t take the opportunity to max my contributions I will potentially be losing on $1,770 in tax savings ($300 for each $1,000).
So the fix I have worked out for myself is to bump up my contributions to meet that $15,500 goal by the end of the year. I have only 2 1/2 months left and it will not be a simple task, but since I wasn’t spending all of that extra cash we have been receiving lately, I think I will be able to manage.
There is one complication though. My employer has a limit on how much I can contribute from each pay check, which means I may still be somewhat short. Despite the fact, I am glad I had the time to think about it today and didn’t miss this by far the hottest bargain I ever had!
Image courtesy of Fotosearch
I would think it’s ideal to max out your 401K, but only up to the amount your employer matches.
At that point, I’d set up a Roth IRA. It does use post-tax money, which isn’t what you’re looking to do, but when you withdraw it, you don’t pay any taxes on the income you’ve earned from stellar stock picks and what not.
Although I agree that the Roth IRA is a great idea for retirement saving, I agree with you Russ that it doesn’t fit his current goal of avoiding Uncle Sam. Yan, you could look into setting up a traditional IRA which would possibly help you dodge the higher tax bracket this year, but you will end up having to pay taxes on that money eventually. I personally get the biggest tax savings from owning a house. All that interest and property taxes helps a ton with the tax time blues.
Russ A:
I always believed my income at retirement would be lower and my tax bracket different so I am better off deferring paying my taxes until I retire. Being able to avoid tax on my income from investments is something I have not given much thought yet. Thanks for your comment.
Alex:
I am a home owner and being one does help a lot with my taxes. If I am able to pull this off I might end up increasing my 401K contributions and opening a Roth IRA as well. Will have a better idea closer to the end of the year…
By the way, here are some interesting thoughts on how much you should contribute to your 401K plan. Here is my favorite part: “start at a high amount (20%? 25%?), and keep decreasing it until your take-home pay is a manageable amount”