401(k) magic


There are all sorts of creative tax loopholes out there for savvy investors to exploit, and over the years I’ve looked at (and even tried) plenty of them.

But the truth is, you don’t have an army of fancy Ivy League tax lawyers to massively lower your federal income tax bill.

The single best tax shelter out there happens to be one that is available to the vast majority of working Americans: the humble 401k plan.

 

savings

 

Investment Vehicle

The 401(k) plan is the only investment vehicle I’ve ever seen that offers instant, tax-free “returns” of 100%, via employer matching.

And depending on what federal tax bracket you find yourself in, you can get instant “returns” of 10% to 39.6% due to the tax deferral.

That’s real money, to say the least.

 

Tax Benefits

And all of this assumes your 401(k) contributions and matches sit in cash. We haven’t even touched on actual investment returns yet, for good reason.

A well-constructed mutual portfolio might return 8%-10% per year if you’re lucky, which isn’t bad, of course. But it pales in comparison to the matching and tax benefits.

The humble 401(k) plan is a veritable money-printing machine. Yet it can be remarkably easy to make a mess of things and kill the goose laying the golden eggs.

 

Contributions

This is America. If you’re reading this, chances are good that you make enough money to eat and keep a roof over your head.

Yes, our expenses rise over time due to inflation and family changes, such as the addition of children.

But it’s safe to say that if you were able to survive on the income you earned last year, you should be able to survive on the same amount this year and do so comfortably.

 

Salary Bumps

So, as you get salary bumps, try to continue living on your old salary and use the raise to increase your 401(k) contribution.

You don’t have to eat ramen noodles or sell blood to make ends meet. Just avoid lifestyle creep, and you can get a lot closer to maxing out your 401(k) plan.

I know, I know. That new car is just begging you to buy it.

But you can stretch another year out of your old car, and 20 years from now, when you look down at your 401(k) balance, you’ll be happy you did.

Photo Credit: Tax Credits via Flickr Creative Commons

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Charles Sizemore
Charles Sizemore
Sizemore Capital Management LLC is a registered investment advisory firm located in Dallas, Texas. Charles Lewis Sizemore, CFA is the founder and Chief Investment Officer of the firm.