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Tuesday, May 5, 2009

Uncle Sam Pays You to Save

If you are new to personal finance and retirement savings, then you might not know about the incredible tax savings that you can experience using auto deduction into your 401k, 403b, and IRA accounts at work.

I started out deducting $25 a paycheck 18 years ago and couldn't imagine how I would be able to live without that extra $25 every two weeks. Fastforward 18 years and I managed to get by quite well! I own my own car, have more clothes and shoes than I know what to do with, go out to dinner with friends, and have a retirement porfolio - invested mostly in cash and bonds - that is worth $100,000+. And this year I bit the bullet and began putting away the full $20,000 a year. How?

Being thrifty, living below my means and most importantly, saving on taxes. The new 2009 tax tables are available on the website and here at a this personal finance blogger site No Credit Needed

As a single Mom, head of household, making $73,000 per year, my taxes are figured like this

If Taxable Income Is:

Not over $11,950
The Tax is 10% of the taxable income

If Taxable Income is over $11,950 but not over over $45,500
The tax is $1,1950 plus 15% of excess over $11,950

If Taxable income is over $45,500 but not over $117, 450
The tax is $6,227.50 plus 25% of the excess over $45,500

If Taxable Income is over $117,450 but not over $190,200
The tax is $24,215 plus 28% of the excess over $117,450

If Taxable Income is over $190,200 but not over $372,950
The tax is $44,585 plus 33% of the excess over $190,200

If Taxable Income is over $372,950
The tax is $104,892.50 plus 35% of the excess over $372,950

So my tax burden is $6,227.50 plus $6875 = $13,102.50

Whoa! I didn't itemize taxes last year, because I don't own a home, but I only paid abut $5,000 in taxes. (legitimately!)

By contributing $20,000 to my 403B this year my tax burden drops to $1875 + $6227.50 = $8102 or by $5,000.

(More correctly, I would say that my tax burden is deferred to when I begin withdrawing funds from the 403B and supposedly, my tax bracket will be lower.)

With various other tax savings such as insurance premiums taken out of my check before taxes, I am able to reduce my tax burden even more each year.

If you haven't started taking advantage of your workplace retirement auto deductions, don't fret too much (this is the Real Life Money blog and I get it!). It took my 10 years to convince myself that I could afford to put away the maximum amount into retirement. And it was easier when I began putting money into bond funds, rather than compound the fear with trying to figure out stock fund purchases that were offered to me.

Baby step of the week: investigate your employer's 401K/403B accounts and defer AT LEAST $25 a paycheck. It's a great habit to get into and it's Fun To Watch it Grow...

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