Retirement plan decisions made easy
Drill Down: Tax Exclusion for Everybody
Cutting back your take-home pay to prepare for a distant retirement is a hard decision for many people, but it’s not as expensive as it seems. Money that goes into your regular 401k is not taxed, so you’ll have less withholding from your paycheck. People in the 30 percent tax bracket find that every $100 that goes into the 401k only costs $70 of take-home pay. That’s because when the $100 is “paid” to you, $30 of it goes to the government, and only $70 finds its way to your paycheck. This is why contributing to your 401k doesn’t cost as much as it seems.
To do the arithmetic yourself, you need to know your federal tax bracket. If you live where there’s a state personal income tax (and most people do), add the state tax bracket. A few cities also levy income taxes.
It’s important to use your “marginal tax rate” rather than average tax rate. The marginal rate is the tax on an additional dollar of income. This is different from your average tax rate, which is the total dollars you pay in tax divided by your total income.
At the federal level, your marginal rate may be as low as ten percent or as high as 39 percent. State tax rates range from one percent up to ten percent.
To find your marginal tax rate, first find your “taxable income.” Here’s where to find it, based on the kind of tax return you filed:
If you filed form 1040, line 43
If you filed form 1040A, line 27
If you filed form 1040EZ, line 6
Then use the following table to find your marginal tax rate:
|
Tax Rates, 2007 |
||||
|
Tax Rate |
Married Filing Jointly or Qualified Widow(er) |
Single |
Head of Household |
Married Filing Separately |
|
10% |
$0 - $15,650 |
$0 - $7,825 |
$0 - $11,200 |
$0 - $7,825 |
|
15% |
$15,651 - $63,700 |
$7,826 - $31,850 |
$11,201 - $42,650 |
$7,826 - $31,850 |
|
25% |
$63,701 - $128,500 |
$31,851 - $77,100 |
$42,651 - $110,100 |
$31,851 - $64,250 |
|
28% |
$128,501 - $195,850 |
$77,101 - $160,850 |
$110,101 - $178,350 |
$64,251 - $97,925 |
|
33% |
$195,851 - $349,700 |
$160,851 - $349,700 |
$178,351 - $349,700 |
$97,926 - $174,850 |
|
35% |
over $349,700 |
over $349,700 |
over $349,700 |
over $174,850 |
After 2007, you can find updated tax rates from the Internal Revenue Service by searching for “IRS federal tax rate schedules” plus the year.
Don’t forget to add in your state tax rate. There are too many state tax rates for me to publish them all, but your state tax instructions will probably be helpful. A general guide to state taxes is available from the Federation of Tax Administrators (www.taxadmin.org).
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Lesson 1: What the Heck is a 401k, and What’s So Great About It?
» Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
Lesson 9: Your 401k, Your Other Assets, and Your Life
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