One of the easiest ways to lower your taxable income in a given year is to increase your 401K contributions. When you contribute to your tax-deferred retirement account you get to take a deduction right off the top of your taxable income. Since we live in a progressive tax system (i.e. tax percentages get bigger the more you make.), you are making the biggest dent in your tax bill.

Okay, so when it is not the best idea to max out your 401K? Well, is your tax for the year zero? If it is you should not be contributing to a 401K. Instead, you should put funds into a Roth IRA. There are times when a person’s tax bill is zero and there are unused tax credits that go to waste. In these situations it is best to put your retirement savings into a Roth.

If your company is giving you a match then you would want to get every penny of that match as it is your money just waiting to be taken. Everybody’s situation is different. Please contact me if you have any specific questions.

-Dan