U.S. markets open in 9 hours 14 minutes
  • S&P Futures

    3,930.75
    +31.25 (+0.80%)
     
  • Dow Futures

    31,398.00
    +185.00 (+0.59%)
     
  • Nasdaq Futures

    11,960.75
    +120.00 (+1.01%)
     
  • Russell 2000 Futures

    1,788.20
    +16.00 (+0.90%)
     
  • Crude Oil

    110.79
    +0.51 (+0.46%)
     
  • Gold

    1,852.80
    +10.70 (+0.58%)
     
  • Silver

    21.87
    +0.20 (+0.90%)
     
  • EUR/USD

    1.0595
    +0.0034 (+0.32%)
     
  • 10-Yr Bond

    2.7870
    -0.0680 (-2.38%)
     
  • Vix

    29.43
    +0.08 (+0.27%)
     
  • GBP/USD

    1.2542
    +0.0046 (+0.37%)
     
  • USD/JPY

    127.3400
    -0.5100 (-0.40%)
     
  • BTC-USD

    30,201.66
    +857.40 (+2.92%)
     
  • CMC Crypto 200

    674.89
    +1.52 (+0.23%)
     
  • FTSE 100

    7,389.98
    +87.24 (+1.19%)
     
  • Nikkei 225

    26,895.79
    +156.76 (+0.59%)
     
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

How your 401(k) impacts your taxes

·Personal Finance Reporter
·1 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

If you’re contributing to a 401(k), making the maximum contribution lowers your taxable income, a huge benefit to taxpayers.

“401(k) contributions are pre-tax contributions and what that means is that any amount that you contribute towards your 401(k) is taken out of your gross income,” says Lydia Vercelli, a certified public accountant in New York City. The more you contribute, the lower your taxable income will be.

For the 2018 tax year, you can contribute a maximum of $18,500 to a 401(k) account if you’re under 50. In 2019, the limit will increase to $19,000. If you’re over 50, your maximum contribution climbs to $24,500 for the 2018 tax year. Next year, the contributions will be capped at $25,000.

You should be maxing out your contributions each year, and taking advantage of your company’s match program, Vercelli says. “That's attractive because it's additional dollars that the employer contributes on your behalf,” she says. Essentially, it’s free money going to your retirement savings.

You can start taking distributions from your 401(k) account at 59 ½, and at that point, those distributions will be taxed like regular income. Because you may not be working, you’ll be in a lower tax bracket, so your tax rate will most likely be lower. If you want to wait and continue contributing to retirement, you can do that until 70 ½. At that point, you must begin withdrawing from your account, and the money will be taxed at that time.

WATCH MORE

How to tackle taxes in retirement

How to avoid missing out on tax deductions even if you're missing receipts

Here’s what happens when you make a mistake on your taxes