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Hello. All advice is appreciated. I'm trying to see if I can further increase my 401K contribution by stating a higher deduction number on my W4 form from my employer. I currently use a zero, which pretty much gives me the highest refund at the end of the year. I also know this is not the smartest way to handle my money (basically giving the government an interest free loan). But by assigning a higher deduction number, like a one or two, I'll get more in my paycheck and less at the end of the year. What I would like to know is if I could redirect the extra money I get in my gross paycheck with a higher deduction number to my 401K? I would rather my extra gross pay go directly into my 401K. I also hope that by increasing my 401K contribution, say from 10 to 15 percent, I'll further reduce my taxable income and that this would counter a possible tax payment (because of the higher deduction numbers on the W4). Does this make sense to anyone? Or does anyone know of a good website that would allow me to come up with the best plan regarding this scenario? Thank you.


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I think your basic plan is sound. Instead of having too much withheld and getting a big refund with your tax return, reduce your withholding and send that money you're not spending every week to your 401k plan.

If you want to see what your paycheck would look like with various changes, try www.paycheckcity.com . They have a paycheck calculator that will help you see what the net result of your proposed changes will be.

An alternative approach that some might suggest is to direct that extra money to a Roth IRA (if you are eligible for one). That won't reduce your current taxes, but it is a reasonably good vehicle for long-term retirement savings. You need to be sure you are getting the full match on your 401k before considering this. Not getting the full match that is available is just plain dumb. (A couple of dire cicrumstances excepted from the "dumb" remark.)

--Peter
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YES - Makes sense!

You can use the web or set up a spreadsheet to run scenarios and determine fairly accurately what amount you will have in your paycheck and what amount tax you will have due and the refund. I would encourage reducing the refund to the minimum [I actually try to owe a bit]

DrTarr

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Um, the 401K contribution is not a percentage of gross pay, but of net pay. So your withholdings have nothing to do with how much get in your 401K. However, you can up your 401k contributions, and up your deductions, in order to keep you takehome pay roughly the same. This would send the money to your 401k and decrease the refund, thereby accomplishing what you were probably trying to say.

But you can of course up your 401K contribution without changing the deduction too.
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However, you can up your 401k contributions, and up your deductions, in order to keep you takehome pay roughly the same. This would send the money to your 401k and decrease the refund, thereby accomplishing what you were probably trying to say.
----------------*,*-----------------

This is how I read what his question? Although there was some consternation on the use of extra money I get in my gross paycheck

DrTarr
Who thinks his paycheck is gross on a regular basis, every two weeks.


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Um, the 401K contribution is not a percentage of gross pay, but of net pay. So your withholdings have nothing to do with how much get in your 401K. However, you can up your 401k contributions, and up your deductions, in order to keep you takehome pay roughly the same. This would send the money to your 401k and decrease the refund, thereby accomplishing what you were probably trying to say.

In case a lurker should misread the quoted post out of context, changes in your 401(k) contribution automatically cause the related changes to your withholding. Do not adjust your W-4 to compensate for a change in your 401(k) contribution.

In the particular situation being discussed in this thread OP is getting a big refund and wanted to free up cash for increased 401(k) deductions by decreasing withholding.

Phil
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Um, the 401K contribution is not a percentage of gross pay, but of net pay.

I've got to disagree with this comment. Most companies will calculate your 401k contribution either as a fixed dollar amount or as a percentage of your gross pay. Then, as Phil said, your income tax withholdings are calculated based on your taxable gross pay, which is the gross pay less your 401k contribution (and a couple of other potential items like health insurance). If you start or increase your 401k contribution, your income tax withholdings will decrease automatically to take into account the non-taxable nature of 401k contributions.

--Peter
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I've got to disagree with this comment. Most companies will calculate your 401k contribution either as a fixed dollar amount or as a percentage of your gross pay.

I'm sorry, I said that backwards. 401K is a percentage of net, NOT gross.

That's why I went on to say that your withholding numbers don't effect your 401K payments.

It was 2 am :-P
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Arg, I said it backwards again! < sigh >

Percentage of GROSS... NOT NET.

THAT'S why I went out to say that withdholding number don't effect your 401K payments. Cause they're taken out before all that is calculated.

There :-P
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Arg, I said it backwards again! < sigh >

Hate it I do when happens that.

--Peter
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Arg, I said it backwards again! < sigh >

Hate it I do when happens that.

--Peter (channeling Yoda)
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