5 Common Tax Mistakes to Avoid When Planning Your 401(k)

Here are some common tax mistakes to avoid when planning your 401(k):

  1. Not contributing enough to your 401(k): One of the most significant tax benefits of a 401(k) is that contributions are made on a pre-tax basis, which reduces your taxable income. Failing to take full advantage of this benefit by not contributing enough to your 401(k) plan could result in paying more in taxes than necessary.
  2. Not considering Roth 401(k) contributions: A Roth 401(k) allows you to contribute after-tax dollars to your retirement account, but qualified withdrawals in retirement are tax-free. If you believe that you will be in a higher tax bracket in retirement than you are now, contributing to a Roth 401(k) could save you money on taxes in the future.
  3. Not taking advantage of catch-up contributions: If you are 50 or older, you can make additional catch-up contributions to your 401(k) plan. These additional contributions can help you maximize your retirement savings and reduce your taxable income.
  4. Not reviewing your investment choices regularly: Failing to review your 401(k) investment choices regularly could lead to suboptimal investment returns and higher tax bills. Make sure to review your investment choices periodically and adjust them as needed based on your goals, risk tolerance, and market conditions.
  5. Not taking advantage of employer matching contributions: If your employer offers matching contributions to your 401(k), failing to contribute enough to receive the maximum match could mean leaving free money on the table. Make sure to contribute enough to receive the full employer match and take advantage of this valuable benefit.

Remember that specific tax rules and regulations can vary based on your individual circumstances and location, so it’s always a good idea to consult a qualified tax professional and/or financial advisor for personalized advice.

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