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One Easy Move That Could Save You $4,000 or More on Your Taxes

Rich man posing with money bags and dollar bills
Getty Images/Vetta
As you prepare to wade through this year's mountain of paperwork to file your 2013 taxes, you might want to start looking into ways to cut your 2014 tax bill at this time next year.

You may well have options that could cut thousands of dollars off your 2014 tax bill -- maybe even $4,000 or more. Better yet, not only could you cut your bill by that much next year, you could get those tax savings to compound for you in a tax-advantaged way for the rest of your career.

So what's the trick? It's simple: Contribute to your traditional 401(k), 403(b), TSP, or other qualified employer-sponsored traditional retirement plan.

How it Works

Every dollar you contribute to a 401(k) or similar plan cuts a dollar off the amount of your income that's exposed to federal income tax. In addition, while your money is in the plan, the profits you make are tax deferred. You can collect dividends and take capital gains within the plan without worrying about immediate taxes. In fact, unless you're investing in a way that generates something called Unrelated Business Taxable Income , you won't get taxed on the money at all until you withdraw it from the plan.

The table below shows the federal income tax savings you'd see by contributing the maximum allowed to a typical 401(k) or similar plan in 2014. If you're under age 50, you can contribute $17,500 in 2014, while those 50 and older are allowed to make catch-up contributions that raise their limit to $23,000. (Note that your contribution may be further limited if you're considered a highly compensated employee and your plan fails the IRS' "top heavy" tests.)

Tax Bracket Under Age 50
($17,500 max)
Age 50+
($23,000 max)
10% $1,750 $2,300
15% $2,625 $3,450
25% $4,375 $5,750
28% $4,900 $6,440
33% $5,775 $7,590
35% $6,125 $8,050
39.6% $6,930 $9,108
Tax bracket data from Forbes. Contribution limits from about.com. Calculation by author.

In addition to the savings at a federal level, you may see savings in your state income taxes, too. If you're in the 25 percent tax bracket or above, your tax savings can easily exceed $4,000. Those tax savings reduce the out-of-pocket impact of your contributions and make it that much easier for you to sock away money for your retirement.

Your Money Working for You

And while the tax breaks associated with putting money in your 401(k) are great, when all is said and done, the bigger benefit comes to you in the long run, via years of tax-deferred growth. That benefit can easily add up to more than the tax deduction you gained from your initial contribution. And the money in your 401(k) will likely provide the major portion of what you'll have available to spend during your retirement.

So if your employer offers you a 401(k) or similar plan, now's a great time to get signed up for it and start contributing. And if you're already signed up, it's time to consider contributing more -- as much more as you can. Whether you're looking forward to saving money on your 2014 taxes or to enjoying your golden years, you'll be glad you did.



Chuck Saletta is a Motley Fool contributing writer. Try any of our newsletter services free for 30 days.

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scottee

what if congress scrapped the 73,000 pages of tax code
and everyone just paid a small national sales tax with no deductions for anyone for anything?
they would probably collect more, everyone would pay some, the rich would pay more, we could close down the IRS, congress would have a lot less power, and April 15 would just be another spring day.

February 11 2014 at 2:52 PM Report abuse rate up rate down Reply
tfarnon

I\'ve been doing this for years. I dump piles of money into my 401(k) and my IRA accounts every year. And when I was employed at a place where I could have a 403(b), a 457 and an IRA? I maxed them all out.

February 03 2014 at 7:26 AM Report abuse rate up rate down Reply
toosmart4u

Retirement, if you are on social seciryity and medicare thank a democrat, if you want to end these 2 fine programs vote republican. You republicans should learn how to think for yourself and not listen to the big money machine of the GOP.

February 01 2014 at 3:09 AM Report abuse rate up rate down Reply
1 reply to toosmart4u's comment
betty_brock

Dems have robbed my paycheck for 40 years. I could be rich investing that SS tax money. A pox on Dems.

February 01 2014 at 2:16 PM Report abuse -1 rate up rate down Reply
paddleman1928

what happens when the gov't nationalizes your retirement plan?

January 31 2014 at 11:06 PM Report abuse -2 rate up rate down Reply
k4jlp

Now kids, stop drinking so much sugar water, it makes you grumpy and rots your teeth.

January 31 2014 at 9:24 PM Report abuse rate up rate down Reply
skcarcomed_0

Somehole is wondering if his mother is going to look for a job. I think that's impossible.

January 30 2014 at 10:11 PM Report abuse -4 rate up rate down Reply
skcarcomed_0

irq.hide
Then you come to daily finance and write stupid posts.

I see you already have that covered.

))))))))))))))))))))))))))))))))))))))))))))))))))))))

Not so Skippy. That\'s your job to write those types of posts on Daily Finance. You must be having a bad day today Skip. Your posts are a bit whiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiny.

January 30 2014 at 6:50 PM Report abuse -5 rate up rate down Reply
jdykbpl45

what if you have no job due to Obama/s stupidity?

January 30 2014 at 5:09 PM Report abuse +2 rate up rate down Reply
martinru2

Assuming you have a \"401K\" --assuming you are under 50 ---assuming you even have a paying job... ----What does everybody else do?

January 30 2014 at 4:16 PM Report abuse +7 rate up rate down Reply
betty_brock

We did that.

January 30 2014 at 3:37 PM Report abuse -5 rate up rate down Reply