<p>Is lowering your income by putting $100.00 per pay period in a pre-tax pension fund equal to voluntarily paying an extra $100.00 per pay period in Federal taxes in terms of your ultimate tax liability.</p>
<p>no… :)</p>
<p>your question is actually a little vague… and now that my head hurts thinking about it:</p>
<p>If you put the $100 in a pretax pension fund that will lower your taxable income by $100 and lower your “ultimate tax liability” by $100 times your marginal tax rate… </p>
<p>Increasing your withholding by $100 per pay period will leave you with a higher income and higher tax liability. But you will already have paid it! So even tho you will pay more in taxes in the second scenario (that’s what I think of as your “ultimate tax liability”) you will get a bigger refund, (or write a smaller check to the IRS) because you will have paid lots more in taxes over the course of the year.</p>
<p>but if you are doing this for financial aid
remember that while retirement funds aren’t generally looked at
the year that you put money into funds- that money is considered to be available for tuition</p>
<p>It’s not for financial aid purposes.</p>
<p>What I’m trying to do is avoid making another large payment to the IRS. I have increased the amount of my witholding significantly as well as increasing pre-tax deductions for various retirement plans. </p>
<p>My thought is that if I can reduce the ultimate cost of my taxes by putting more into pre-tax pensions, rather than paying the taxes upfront, I would benefit by increasing my pension benefits and at the same time lower my taxes. But, NJ you appear to be saying that increasing pre-tax deductions doesn’t lower you tax obligation as much as increasing your witholding.</p>
<p>If it isn’t a dollar for dollar is there an way I can figure what the payments to the pension fund are worth in terms of lowering my taxes?</p>
<p>NJ:</p>
<p>I think we’re all confused now. hahahaha</p>
<p>tsdad: if you put $100 per month extra into a pretax account, such as a 401(k), you will lower your tax liability for the year by $100 times your marginal tax rate as NJ notes in his/her first paragraph. Thus, if your marginal tax rate is 35%, you will save $35.00 in taxes for this year ($100.00 x 35%).</p>
<p>Note, this is separate from witholding, as computed off of your w-4.</p>
<p>If you believe Frontline and have 80% of your working income in retirement you probably won’t save much but you delay the payment many years which has some real value.</p>
<p>I think I’ve got it now. It’s not dollar for dollar. I need to look at what my marginal tax rate is. I can add more pre-tax contributions, but I can only reduce the extra tax payments a certain percentage.</p>
<p>Thanks everyone. </p>
<p>Eighty percent? Considering the huge amount that goes into paying for USC, we’ll hardily need that amount. Only one more year of that. Plus we (my wife will soon be an annuitant) get annual cost of living increases on the largest portion of our retirement income. It went up 4% last December. </p>
<p>I’ll show my relatives who spent while we saved!!!</p>