Being in a lower tax bracket?

Question

What are the advantages of being in a lower tax bracket?

Should I invest enough in my 401K to get me to the next lowest tax bracket?

Should I try to go as far under my tax bracket as I can or should I try to stay as close to the maximum as I can?

Answer 1

There is nothing all that magical about tax brackets.  When you cross over into a new tax bracket by having more income, the higher tax rates only apply to the amount that you are over the threshold.  So if you cross into the next tax bracket by only $100, only that $100 is being taxed higher - the rest of your income other than the $100 is not affected in any way.

There are other concerns relating to your gross income level.  Many credits and deductions phase out when you make more and more money (our tax system is designed to punish success) so you may want to manipulate your gross income by making 401-K and IRA contributions for those reasons even more so than for the tax bracket thing.  Your tax professional can explain all these credits and deductions that may be at risk.

So whatever your reason, DO invest in your 401-K.  At least put in as much as your company matches - if they match - otherwise you are saying NO to money they are trying to give you.

Answer 2

Tax brackets are very misunderstood.  Being in the next higher tax bracket doesn't mean that all your income is taxed higher, just the income that's over that bracket limit.  So if your taxable income is $2 into the next higher bracket, then you only pay the higher rate on that $2.

That said, it's wise to put as much as you can into a 401k, especially if there is an employer matching program available,  But don't worry about the tax bracket limit.

Answer 3

Lower Tax Bracket = Lower Taxes on your next earned dollar

General Rule is contribute at least the amount of your earnings to take advantage of maximum employer matching to your 401k.  After that, you need to consider your current and future needs for your money.  401k contributions are basically tied up until you near retirement.  Unless your willing to pay a penalty or meet one the exceptions.

Yes, you want to reduce your taxable income as much as possible to get you into the lowest bracket.