- Days left
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.

Increase your money and finance knowledge from home

Timing Your Spending

How to pay less by changing when you purchase.

View Course »

Understanding Credit Scores

Credit scores matter -- learn how to improve your score.

View Course »

TurboTax Articles

Will Medicare/Medicaid be Impacted by ACA?

The Affordable Care Act put in place significant tax-related programs that impact Medicare and Medicaid, such as increased Medicare taxes on earned and unearned income for high-wage earners, and Medicaid changes that increase the number of insured individuals. Establishing whether you are affected by the ACA-imposed taxes, or are eligible for certain health programs that fall under the Centers for Medicare and Medicaid Services, is determined by filing your income tax.

8 Things You Think Are Tax Deductible That Aren't

There?s a fine line between looking to save money on your taxes and taking deductions that will raise eyebrows at the Internal Revenue Service. Some taxpayers are tripped up by expenses that they assume are tax deductions, but don?t qualify under IRS guidelines. Here are a dozen items that can lead to unpleasant surprises in case of an audit.

Essential Tax Forms for the Affordable Care Act

The Affordable Care Act (ACA), also referred to as Obamacare, affects how millions of Americans will prepare their taxes in the new year. The law now includes penalties for all who haven?t obtained health insurance -- and those penalties are expected to be paid at tax time. The ACA also provides tax credits to help people pay for insurance, and you can claim those credits when you file your taxes. The Internal Revenue Service (IRS) has introduced a number of tax forms to accommodate the ACA.

How to Determine if You Have Minimum Essential Coverage (MEC)

The Affordable Care Act, also known as Obamacare, requires most Americans to have health insurance that meets a government standard known as "minimum essential coverage," or MEC. Whether your insurance qualifies as MEC depends not on the plan itself, but on how you obtained your coverage.

What are 1095 Tax Forms for Health Care?

In 2014 the Affordable Health Care Act, also known as Obamacare, introduced three new tax forms relevant to individuals, employers and health insurance providers. They are forms 1095-A, 1095-B and 1095-C. These forms help determine if you need to comply with the new shared responsibility payment, the fee you might have to pay if you don't have health insurance. For individuals who bought insurance through the health care marketplace, this information will help to determine whether you are able to receive an additional premium tax credit or have to pay some back.

Add a Comment

*0 / 3000 Character Maximum

6 Comments

Filter by:
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
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