Should i reduce my 401k contribution 2011

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From Email. To Email. Send Cancel Close. Open Enrollment. HR Daily Newsletter News, trends and analysis, as well as breaking news alerts, to help HR professionals do their jobs better each business day. Contact Us SHRM Page Information Page Properties. In addition, the option would increase outlays for Social Security by a small amount. The estimates do not include those effects on outlays.

Current law allows taxpayers to make contributions to certain types of tax-preferred retirement plans, up to a maximum annual amount that varies depending on the type of plan and the age of the taxpayer. The most common such plans are defined contribution plans any plan that does not guarantee a particular benefit amount upon retirement and individual retirement accounts IRAs.

Defined contribution plans are sponsored by employers. Some—most commonly, k plans—accept contributions by employees; others are funded entirely by the employer.

IRAs are established and funded by the participants themselves. Most of the tax savings associated with retirement plans arise because the investment income that accrues in the account is either explicitly or effectively exempt from taxation. That is clearest in the case of Roth retirement plans—both IRAs and k s. Contributions to such plans cannot be excluded from taxable income; instead, the participant benefits by not paying tax on the investment income, either as it accrues or when it is withdrawn.

More traditional types of tax-preferred retirement plans allow participants to exclude contributions from their taxable income and defer the payment of taxes until they withdraw funds. If the taxpayer is subject to the same tax rate that applied when contributions were made, the value of the deduction is offset by the tax on withdrawals.

The actual tax benefit is equivalent to that provided by Roth plans—effectively exempting investment income from taxation. In the traditional structure, however, the tax benefit can be higher or lower than under a Roth plan, depending on the difference between the participant's tax bracket at the time contributions are made and when withdrawals are made.

The value of the tax exemption for investment earnings increases with the participant's income tax rate. Thus, an employee in the 12 percent tax bracket saves 12 cents on each dollar of investment income accrued in his or her retirement plan; however, an employee in the 35 percent tax bracket avoids taxes equal to 35 cents per dollar of investment income. For some forms of investment income, such as capital gains, lower tax rates apply in each tax bracket, and the savings are smaller.

In general, the limits on a person's contributions apply to all defined contribution plans combined. However, contributions to b plans, which are available primarily to employees of state and local governments, are subject to a separate limit.

The tax deduction for contributions to a traditional IRA is phased out above certain income thresholds if either the taxpayer or the taxpayer's spouse is covered by an employment-based plan but nondeductible contributions—which still enable a taxpayer to defer taxes on investment gains until they are withdrawn—are allowable at any income level. The Social Security OASDI taxable wage base, which governs the amount of pay subject to Social Security tax withholding and affects plans that are "integrated" with Social Security, also is subject to adjustment annually.

The Medicare tax, however, applies to all wages without limit. However, such participant's "average compensation " limit is calculated a bit differently for because of variance in the cost of living indexes over the past few years.

Roth IRAs. Best Retirement Plans for the Self-Employed. Most Popular. Tax Breaks. February 25, Income investors are often all about dividends, but that may not be a smart strategy for retirees.