70. Save $1,000+ per month Maximize your 401K contributions and use a loophole to cash in on the 401K tax-free for you (and your spouse) to close your mortgage with it
Maximize your 401K contributions
If you're not already contributing the maximum, put more into your 401(k), IRA, or other tax-deferred retirement account. You'll also cut the amount of income tax you'll pay each month. (Note that this does not apply to Roth accounts.)
Paying $500 a month into your 401(k) plan, for example, will reduce your federal income tax bite by $50 to $175 per month, depending on your tax bracket. Of course, you'll pay that tax down the road, when you withdraw from your plan in retirement. But in the meantime, invest your tax savings or use them to offset rising prices elsewhere.
The Roth 401(k) is the best of Roth IRA and a traditional 401(k) that allows employees to elect Roth IRA type tax treatment for a portion or all of their retirement plan contributions, in other words, when you withdraw in retirement, your Roth 401(k) money comes out tax free. This can be huge tax advantage if you expect that you will be in a high tax bracket in retirement.
Under the Roth 401(k), employees can decide to contribute money on an after-tax basis instead of pre-tax elective deferrals under the traditional 401(k) plan. The combined contribution, whether to a traditional 401(k), a Roth 401(k), or to both, cannot exceed $16,500 per year. If the employee is over 50, they can choose to contribute an additional $5,500 since retirement is closer.
Tax deferred growth
The growth in your 401(k) grows tax deferred, meaning the IRS does not tax you on the stock appreciation, interest and dividends. Youre money grows untouched by Uncles Sam so more gets reinvested to take advantage of the compounding effect.
Requirement minimum distribution
By April 1st following the year that you reach age 70 ½, the IRS requires that you begin taking distribution or money out of your 401(k). Since 401(k) was created for the purpose of accumulating retirement funds, the government wants to make sure that you use it for that purpose and not for some fancy estate planning tax avoidance strategy.
Penalties & tax on premature distribution
If you try to take out money from your 401(k) before you reach age 59 ½, the IRS is going to hit you with you a 10% penalty for premature or early distribution and the withdrawal will also be subject to ordinary income taxes. So you get hit twice for not playing by their rules.
Exceptions for early distribution penalty
The early distribution penalty may be waived under the following circumstances:
1. Death or disability
2. You retired or left your job at 55 or older
3. You elected to receive substantially equal payments over your lifetime
4. Medical expenses exceeding 7.5% of your adjusted gross income
5. Required by a divorce decree or separation agreement
Gameplan Use a loophole to cash in on the 401K
If you save $1,200 per month with your 401K, and your employer contributes another $600 per month (like 50 cents to the dollar), you are saving over $20,000 per year, then in 10 years time, you have saved over $200,000.
Then, you use a loophole to cash in on the 401K tax-free, (like use a divorce or separation agreement for you and your spouse), then use this $200,000 to close and cover your remaining mortgage payments and any (expensive) debt you may have (like credit cards). You will have saved over $1,000 per month of mortgage payments and your house is fully paid off in 10 years time. Talk to your tax adviser.
