Things You'll Need:
- Bank account information
- Tax returns from previous fiscal year
- Payroll deduction form
-
Step 1
Select a traditional 401k plan to contribute pre-tax income. These accounts allow you to deposit part of each paycheck before income taxes into a long-term retirement account. Consider riskier international investment or derivative plans for high returns on your pre-tax money.
-
Step 2
Project the tax burden that you will face when you withdraw money from your 401k plan upon retirement. Federal regulations require income taxes to be taken from the principal money as well as the money earned from long-term investment. You can look at income tax trends over the last 20 years to make an educated guess at future tax rates.
-
Step 3
Fill out an automatic payroll deduction form through your employer. These deduction forms require you to fill out the appropriate bank account information as well as the investment account that you are using.
-
Step 4
Figure out your annual income for each year that you contribute funds to a 401k plan, minus deferral amounts. You need to take your total income, subtract the total amount you deferred to a 401k in a fiscal year and use the result when calculating your tax burden.
-
Step 5
Observe federal limits on 401k contributions during a fiscal year. The Department of Treasury and the U.S. Congress have established the upper limit of annual contributions at $15,500 for all employees.
-
Step 6
Steer clear of early withdrawal penalties and taxes that are assessed before you turn 59 years and 6 months old. Your pre-tax contributions are only beneficial if you remain diligent about maintaining a steady level of income deferral. Early withdrawal leads to income taxes assessed on the principal and earned interest on the account, along with a penalty of up to 10 percent of withdrawn funds.
