Tax Tips 101

This seems to be becoming an increasing popular option with many companies. And I see many clients making the choice based on a co-workers decision, when in reality each taxpayer is in a very different situation and should evaluate their own situation.

It is easy to get caught up in the hype that with the Roth 401k, you pay no tax on the money in retirement, and it is quite attractive that your earnings are never taxed. But with the tax deferred 401K, you can put a lot more away to generate more profitability. Using an average tax bracket, you could put away approximately a 30 percent more into the tax deferred 401k without noticing a change on your net check. (Or, you could invest approximately $100, instead of $70.) That gives you a lot more growth potential.

Putting into the tax deferred option, brings down your adjusted gross income, which can be the difference between hitting your phase-out breakpoints for many tax incentives, such as education credits, etc.

I cannot emphasize enough that no two situations are the same, and it is important to talk to your tax advisor for which option is best for you and your long-term goals!

Barb Chambers, CPA resides in McNabb. She can be reached at 815-882-2437 or 815-252-2427 or at Baccpa1@gmail.com.