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Some Effective Ways to Decrease Your 401(k) Taxes

Decrease Your 401(k) Taxes

You need to pay taxes when you withdraw money from your traditional 401(k) account. The money from your 401(k) account will be subjected to normal income tax. The amount you need to pay for tax is dependent on the amount you’re withdrawing from your account. However, if you’re younger than 591/2 and you want to withdraw money, you need to pay an additional 10% penalty. 

Make sure you pay close attention to both your Roth IRA and Roth 401(k) account so that you can pay the taxes now rather than later. This way, when you withdraw money from your 401(k) account, you will be able to minimize your tax burden. There are some great ways you can decrease the taxable burden on your 401(k) account as well as avoid the 20% mandatory withholding. Read the article to know how you can leverage the benefit. 

Explore the NUA Options 

Suppose your 401(k) account has a company stock. In that case, you will be eligible for NUA or Net Unrealized Appreciation treatment when the stock portion of your company from your 401(k) account is distributed to a brokerage account or taxable bank. When you implement this strategy, you will be able to pay the income tax as per the original buying price of the stocks. However, remember that the capital gains tax on stock appreciation will be lower. 

Therefore, instead of moving your money to the traditional IRA account or keeping the funds in your 401(k) account, it’s best if you use a taxable account to move the funds. Even though this strategy might seem complex, you will be able to manage your money better. Make sure you contact us, and we will discuss the best retirement plan for you. 

Consider Using the ‘Still Working’ Exception 

When you reach age 72, you will be required to take RMDs from your 401(k) account. Keep in mind that the RMD age was 701/2 in 2019, where later it was changed to 70 through the SECURE Act of 2019. But if you still work when you reach retirement age, you can prevent the RMD rules from being applied to your 401(k) account. 

In short, you will be allowed to keep the funds in your 401(k) account, which will help you leverage the best benefits of the 401(k) account. Not to mention, you can also postpone the taxes on your 401(k) account. Remember that IRS still hasn’t defined how much of a paycheck is applicable for the ‘still working status. This is why you need to be careful if you’re working as a part-timer or consider working on other types of jobs. 

Consider the Tax-Loss Harvesting 

This is another strategy known as tax-loss harvesting, where you need to sell the underperforming securities as per your regular investment account. The losses you get in your securities will offset all the taxes on your 401(k) account withdrawal. When implemented correctly, the tax-loss harvesting strategy can offset some of the tax burdens of the investors that are generated from the 401(k) withdrawal. However, make sure you know the limitations of this strategy. As per Investopedia, make sure you maintain your portfolio


These are some of the most effective ways you can reduce 401(k) taxes. Make sure you let us know if you have any other questions.