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What is a 401(k) and how does it affect taxable income?
A 401(k) is a retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck before taxes are deducted. By contributing to a 401(k), individuals can reduce their taxable income, as the contributions are not taxed until withdrawn during retirement.
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How does contributing to a 401(k) benefit different income groups?
Contributing to a 401(k) can benefit individuals across various income brackets. For lower-income earners, it provides a tax-advantaged way to save for retirement, while higher-income earners can use it to reduce their taxable income and potentially lower their tax bracket.
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Are there limits to how much one can contribute to a 401(k)?
Yes, there are annual contribution limits set by the IRS for 401(k) plans. For 2024, the contribution limit is $20,500 for individuals under 50 years old and $27,000 for those 50 and older. These limits may change annually, so it's essential to stay updated on current regulations.
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Can contributing to a 401(k) impact tax refunds?
Contributing to a 401(k) can potentially increase your tax refund or reduce the amount of taxes owed. By lowering your taxable income through contributions, you may qualify for tax deductions or credits that can result in a larger refund or lower tax bill.
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What are the penalties for early withdrawal from a 401(k)?
Withdrawing funds from a 401(k) before the age of 59 ½ may result in early withdrawal penalties, in addition to income tax on the withdrawn amount. It's important to understand the implications of early withdrawals and explore other options before tapping into your retirement savings prematurely.