Saving for retirement can lower your tax bill

Wondering about the tax implications of your retirement contributions?

You're not alone. As the tax code grows increasingly complex, it can be tough to keep track of all the different ways investments impact your bottom line. But when it comes to 401(k) contributions, there's one big benefit that's worth paying attention to: the tax break.

How does it work?

When you contribute to most 401(k) plans, the amount gets deducted from your paycheck and reduces your taxable income.

So you get two benefits:

1️⃣ no taxes on the contribution (though you’ll likely pay a reduced tax upon withdrawing)

2️⃣ a reduced taxable gross income.

For example, if you contribute $20,000 from an income of $120,000, you don’t pay immediate taxes on that $20,000 and your taxable income goes down to $100,000. This could reduce your tax bill by up to $5,000!

401(k) contributions can also help you lower your tax bill in the long run. In most cases, investment gains earned in a 401(k) account aren't subject to capital gains taxes until you withdraw the money in retirement. And if you're in a lower tax bracket by that point - after all, you will be retired - you could end up paying significantly less in taxes overall.

So why should you take advantage of this tax benefit?

Your equity investments can appreciate into the millions of dollars over a few decades, so the tax breaks add up. Plus, if your employer offers matching contributions, you're essentially getting free money that can help supercharge your savings.

Of course, there are limits to how much you can contribute to a 401(k) each year, and there are other factors to consider when it comes to retirement planning. But by taking advantage of these tax benefits, you can set yourself on a path towards financial independence.

You need to optimize your portfolio within the retirement account in order to make the most of these tax breaks.

Xillion’s 401(k) Optimizer scans your 401(k) account to look for all the inefficiencies. We’ll suggest simple changes you can make and show that those can add up to a big difference over time. For example, you might be in a fund with an unnecessarily high fee structure, or your investment portfolio might be too risk-averse.

To get started, set up your Xillion account for FREE today and navigate to the Portfolio tab to see suggestions for how you can optimize your path to financial independence. And if you have any questions along the way, our investment mentors are here to help.