Simply Junior

How often do you think about your future? Perhaps all you think about is the immediate future of bills to be paid, or the post-retirement luxuries you hope to enjoy. But to enjoy such luxuries you need to have an investment plan in place. Otherwise, how can you afford it? The 401K retirement plan was formulated for this very reason – to help you save for after you stop earning. In a way it is a type of pension plan, with more flexibility than others.

One of the prime advantages of the 401K retirement plan is that it provides tax benefits to the investor, and apart from that the employee has the freedom to choose how much of his or her salary should be put towards this fund. However, some companies give an upper ceiling as to the amount, since apart from what the company sets aside for the 401K plans, the employer has to put aside an equivalent amount.

An employee’s salary is taxed after the 401K retirement plan deduction has been made. For example, if one earns $5,000 per month, and chooses to set aside 10% in a 401K, then tax is not charged on the entire $5,000 – only on $4,500.

There are other retirement investment plans, but the 401K retirement plan is preferred over others, as it is flexible in varied ways. It allows the employee to roll over the money in case they quit their job. This may be rolled into the new employer’s 401K plan trust, or into the individual account.

Also, the 401K retirement plan investor can select what kind of investments to channel funds into. These include mutual funds, bond funds or varying maturities, and money market funds. Some plans permit people to invest their funds in company stocks, US series EE saving bonds, and other options. The options are there and it’s up to each individual to see what suits them best, as long as they are saving for their future.

Taxes of any type and form always burden you. Your income, off and on, is half eaten by the taxes you pay. These taxes can be federal taxes, state taxes, local income taxes, payroll taxes, which include Social Security and Medicare, sales tax, excise taxes and property taxes. However, if you are intelligent enough, you can apply tax-planning tricks that would eventually enhance your income. Given below are the effective steps for reducing your tax burden:

1. Understand your tax situation – By understanding how much tax you will pay, or what part of your income is taxable, you would smoothen your tax burden. In addition, you should keep a fair account of your daily and miscellaneous spending on various items. These include housing, medical care, food, transportation, recreation, clothing and other luxury items. If you calculate, you would come to know that you spend approximately double the amount of above items on the taxes you pay on your income.

2. How much did you pay as taxes – You can estimate how much you paid as taxes the previous year, and how much extra or less will you be paying this year. You can do this by getting the details of the previous year’s personal income tax returns and comparing it with your present income tax. All information in this regard is found in form 1040, line 62, which also gives detailed information on your total tax liability for the year.

3. Plan your investment – If you know the facts, you will be better in generating your wealth. This means, that you can choose available and effective tax-saving investment plans. You can choose NSC, infrastructure bonds, flexibonds (Anshu – Pls check the research, I don’t think there are NSC bonds etc in America) and the like. Thus, you will save a major portion of your taxes and you can invest this money to earn extra profits. It is this money that you used to waste away paying taxes and adding to Uncle Sam’s kitty. What is more, if you reduce your taxes, the government will give you extra benefits on retirement.

4. Tax Saving Strategies – This is the most important step that will make your income grow. You can download some real tax information from the net on various tax saving strategies. In addition, you can consult a local tax professional.

Thus, by following these simple and effective steps, you will certainly improve upon your income by reducing your tax burden.