401k plans are retirement savings and investment plan.
This plan is typically offered by employers and could give employees a tax break.
How can my 401k reduce taxes?
If you do get a tax break on your 401k, it will be based on the money that you contribute. These plans are subject to income tax when you have to take out a distribution. The amount of tax is based on your tax bracket. There is typically a 10% early withdraw penalty too. Read more about it here.
However, there are ways to reduce the taxes affiliated with this plan:
Defer Social Security
Because Social Security benefits usually can’t be taxed unless the beneficiary’s total annual income exceeds a fixed amount, deferring it could be a good option.
Making contributions could really impact your income taxes by reducing your total taxable income for the year.
Net Unrealized Appreciation (NUA)
If the company stock portion of your 401k goes to a taxable bank or brokerage account, you could be eligible. That is as long as you hold that type of plan with company stock.
Mandatory 20% withholding
When you accept 201k distributions and get the money, it is taxed. The service provider withholds 20% federal income tax. However, there is a loophole. If you roll the 401k balance into and IRA and withdraw from there, you don’t have to pay. You will have to pay back the amount in quarterly payments though.