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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25247  
Subject: Re: 401k tax credits Date: 4/8/2014 9:58 PM
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Thanks AJ. So, if I'm reading this correctly, then would a married couple filing jointly making $300,000 be able to contribute 5% of their salary to a 401(k) and be able to deduct the $15,000 contribution from their income, thus lowering their AGI?

It depends on the 401(k) plan that each has available. In 2014, it is possible that each could contribute up to $17,500 ($23,000 if 50 or older by the end of 2014), lowering their joint taxable income by $35,000 ($46,000 if both are 50 or older by the end of 2014).

In order to do this, because of the 'highly compensated employee' rule, each of their plans would have to be a 'safe harbor' plan, that provides matches that are fully vested upon receipt. Otherwise, the plan may be required to limit either the percent or the dollar amount that a highly compensated employee can contribute, which would likely lower the amount that could be contributed.

Additionally, the plan that each has available must allow each one to contribute a high enough percentage of their income to reach the maximum dollar amount. For instance, for someone younger than 50 who makes $100,000, if the plan limits them to contributing 10% of their income, they would be nowhere near reaching the $17,500 limit, and would only be able to contribute a maximum of $10,000. These limits are dependent on the rules of the plan.

However, for a couple who jointly make $300k, if each is working for an employer that has a safe harbor 401(k) plan that allows each to put in a high enough percentage of their individual income to reach the $17,500 limit ($23,000 if 50 or older), it would be completely possible for them to lower their joint Federal taxable income by 11.7% - 15.3% ($35,000 - $46,000), depending on their ages. All of that income would have been taxable at their marginal rate of 33%, so maxing out their contributions would save between $11,550 and $15,180 in taxes due for 2014. Of course, the income taxes are only deferred - they will have to pay taxes on the amount that they withdraw in the future.

AJ
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