401 k

Tax Deductions That Are Commonly Overlooked

Tax deductions can be tricky to understand if you're new to the finance world.

One of the biggest sources of confusion is knowing what you can and can't deduct from your taxes. Deductions can be a massive financial boon for a lot of people, yet not everyone files for them correctly. This causes people to miss out on money that should be theirs. We'll go over some of the most common tax deductions that are overlooked, so you don't get shortchanged when Tax Day comes.

Charitable Contributions

When you start regularly giving to charity, even if the donations are small, you'll want to start getting itemized receipts for your donations. These receipts will help you write off these charitable contributions on your taxes. You can even write off supplies that you bought for use in a charitable cause or any miles you drove on your car while in service to a charity. Make those donations to the Purple Heart Pickup with an open heart, but make sure you get your deduction on top of that.

Student Loan Interest Payments

Student loans take up a significant amount of a lot of people's money. If you're one of these people, make sure that you get a deduction on the amount of interest you paid off in the last year. What's important to remember is that even if you aren't someone's dependent, you can write off the money someone else gave you to pay for said student loans. If someone else helped you pay off part of your loan, don't think that means you can't still get a deduction on that sum.

Child and Dependent Care Credit

If you have a reimbursement account through your job that pays for child or dependent care, you might be forgiven for forgetting about this particular tax credit. However, you can use these funds for a tax credit if you file for them correctly. This is hugely important because this is an opportunity to receive a full tax credit, not just a deduction. You're losing money you could be directly receiving if you don't file for this credit.

Jury Pay Given to Your Employer

A lesser-known tax deduction that often gets overlooked is the money you can deduct from jury pay you gave to your employer. It may not be the most exciting thing to come out of jury duty, especially after handing over any money you receive to your employer, but you do get to deduct however much money your employer made you hand over after you finished jury duty.

Credit for Saving

While this credit is more for people that are working part-time or for those that have a retired spouse, you can get a tax credit for contributing to a 401(k) or another retirement savings plan. This is also a great incentive for those that are just starting out in their careers and need another reason to start saving for the future.

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What to Do with Your 401k After You Leave a Job

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Whether you're leaving a job involuntarily, departing for something new, or just want to prepare for the unknown, it is smart to understand all your options regarding your 401k.

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401(k)

401(k) Retirement Plan Terms You Need to Know

401(k) Plan: Start off knowing what exactly this plan actually is. A 401(k) plan is a tax-deferred retirement plan that is offered through your place of employment. The plan can be a cash election, profit-sharing, or stock bonus plan, or a salary reduction per paycheck plan. This plan will help you save for future retirement. Planning wisely will make for the best returns come retirement time.

Accrued Benefits: This describes the benefits an employee with a 401(k) plan has already amassed to date based upon their salary and work time put in thus far.

Annuity: This is a contractual agreement where the insurance company is held to make regular payments to someone for the rest of their lifetime or an agreed upon time frame.

Auto Enrollment: Sorry, you're not getting a new car. This is actually the practice of enrolling all eligible employees in a retirement plan without their request to participate. If the employee wants to opt-out, they must file a request with HR.



Brokerage Window: In some cases, this is the glass pane where you can peek into the broker's office, but for our purposes, a brokerage window is when a 401(k) plan allows for employees to invest in stocks and funds offered by a brokerage firm and part of the employer's plan.

Elective Deferral: The amount an employee contributed to a 401(k) plan, either pre-tax or as Roth contributions if the employer's plan offers a Roth option. *See "Roth" below.

Employer Matching Contribution: Some employers will put money towards their employees' savings plans. Matching contributions are usually a set percentage of what the employee puts in, up to a fixed limit.

Employer Discretionary Contributions: Employers may have a plan at the end of the year for increased matching contributions or profit sharing. These are tax-deductible expenses.

ERISA: This stands for The Employee Retirement Income Security Act, established in 1974. This act sets standards for 401(k) plan administrators and holds up the same rights and regulations for all plan participants across the board.

Fixed Match: No, not a tennis game with a pre-determined winner, but a matching employer contribution that must be contributed each year to an employee's plan as part of the agreement unless otherwise amended.

Individual Retirement Account (IRA): This is a retirement plan that is person and tax-sheltered. Employees who work for a company that doesn't offer a 401(k) may opt for an IRA instead.



Longevity Risk: We all hope to have enough money saved to cover our expenses for the rest of our lives, but a longevity risk is the chance of outliving one's savings. Hopefully, we are all covered for life by contributing as much as possible during our working years.

Participant: This is the person who is eligible to make contributions to a 401(k) plan or to share in an employer's contributions to a 401(k).

Plan Provider: This is the company or firm that develops and sells the 401(k) plan to your employer. This may be a mutual fund company, an insurance company, a brokerage firm, or another related financial services institution.

Plan Sponsor: In a nutshell, your employer. The plan sponsor is the party that offers the 401(k) plan to their employees. They are responsible for choosing the plan and the provider and which investment options will be delivered by the plan.

Pre-tax: Contributions are put into a 401(k) before taxes are calculated. The employee's gross pay is then reduced by how much is put into the plan.

Retirement Plan: This is a plan person makes to set aside income for use during retirement. A 401(k) is an example of such a plan.

Roth 401(k): This is a special feature of a 401(k) plan that lets employees make contributions on an after-tax basis. The money will grow tax-free and can be withdrawn tax-free once the employee reaches the age of 59½ and has had the account for 5 or more years.

Tax-Deferred: Until money is withdrawn from a 401(k), no federal income tax is paid on contributions or earnings.

Vesting: This is the period of time an employee must work for an employer before they are eligible for a 401(k). Some employers start immediately while others require a year or more of employment.

It's time to prep for retirement. With this 101 on 401(k), you're on the path to saving for the "golden years!"

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Do I Really Need a 401(k) Plan?

To answer this question in one word… YES! But before you run off and sign up for your 401(k) retirement savings plan with your employer, learn why having one is so important and how it can benefit you in the future. You never know what twists and turns your life will take, so planning ahead financially is smart and gives you security for you and your family. A 401(k) is a plan sponsored by your employer that helps you save retirement funds by taking a certain percentage from your pre-tax paycheck, in case you aren't already in-the-know. Here are the most important reasons a 401(k) is right for you.


Loan Options

While the main reason for a 401(k) is to provide for retirement, some plans allow for loans to be taken from them before you retire. For instance, Practical Money Skills explains, "Many plans allow you to borrow from your account for specific reasons, such as buying a primary residence, paying for education or medical expenses, or in case of severe economic hardship. A loan usually must be paid back with interest within five years, and as long as you remain employed by the company, you can pay it back without incurring any income tax liability. The interest you pay goes directly into your account." And Bankrate adds, "The repayment period is often extended for homebuyers."

Additionally, Bankrate advises that a loan from a 401(k) is a smart investment for career advancement. "A 401(k) loan might be useful for acquiring educational credentials needed to keep your job or advance your career. After all, if it results in a boost to your earnings, you'll be able to save more for your retirement and other worthy financial goals." Plus, you can usually pay back the loan via automatic paycheck deductions, as per Forbes.

Just be sure before you take out a loan from your 401(k) that it's the best option you can choose. If you can find another loan with a better interest rate, payback schedule, or other perks, leave your money to grow your retirement savings.


Tax Deductions

According to Kiplinger, "One key benefit of a 401(k) is the tax advantage. Your contributions aren't subject to federal or state taxes, so you can rack up substantial savings." Practical Money Skills explains, "That's because your contribution comes out of your paycheck before income taxes are deducted. That means your taxable income is less, which in turn lowers your tax bill. Thus, you "defer" or postpone paying income tax on your 401(k) savings and any investment earnings they may accumulate until you withdraw the money at retirement. For many people, their income – and therefore income tax rate – is lower at retirement, so they're paying a smaller amount of tax on the money. Plus, if you happen to retire to a state that has no or very low state income tax, you'll be that much further ahead."

Additionally, CNN Money notes a specific type of 401(k) plan called the Roth 401(k) which, "offers a tax break that essentially acts as the reverse of the traditional 401(k): You do have to pay tax on your contributions, but you won't have to pay any tax when you withdraw the money in retirement. So all the money in your account grows tax free."


Matching Contributions

Many companies will match the contribution you put into your retirement savings. U.S. News & World Report recommends taking full advantage of any company match. "Check with your company's human resources department to find out if your employer offers matching 401(k) contributions. If so, make sure you are contributing enough to take full advantage of the match. If you don't you are leaving 'free' money on the table."

Practical Money Skills gives this example, "A common match might be 50 percent of the first 6 percent of pay you save. Under that scenario, someone whose annual salary is $35,000 and who contributes 6 percent to the plan ($2,100) would receive an additional $1,050 in matching employer contributions." Not too shabby!

CNN Money adds, "The match effectively increases your income without increasing your tax bill, since you pay no taxes on matching contributions until you withdraw them in retirement." It's a win-win since "The employer's match money typically vests over 3 or 4 years, meaning you have to keep working for the company for that amount of time before all the matching funds are yours to keep."


Start Now!

As per Wall Street Journal, "Most companies allow you to enroll in a 401(k) right away, although some smaller employers might make you wait up to a year." The sooner you start, the more money you'll accrue over time. One day you'll be able to retire stress-free with money to spend on the things that make you happy – you deserve it!

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