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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Zikzin on June 23, 2015, 12:29:26 PM

Title: Pay off IRS vs Maxing out 401k
Post by: Zikzin on June 23, 2015, 12:29:26 PM
Need to get your insight on some tax options:
We owe about $19k with the IRS and I'm thinking of paying it off by next year, to max out my 401k it will be about the same amount. My question is: would it be tax beneficial for us to max out our 401k and get a refund next year instead of owing money again? Our combined income is $143k married, filing jointly with 2 dependents
Title: Re: Pay off IRS vs Maxing out 401k
Post by: MDM on June 23, 2015, 12:34:31 PM
Define "owe".

Is this an underpayment from previous years and you are paying interest on the debt - and, if so, at what interest rate?

Or is this what you expect to owe in April 2016 for your 2015 taxes, on top of what has been withheld this year?

Or...?
Title: Re: Pay off IRS vs Maxing out 401k
Post by: forummm on June 23, 2015, 12:36:16 PM
What interest is the IRS charging?

With your income you really ought to be able to save a lot more than $20k in a year. Maybe that's the place to look. You could post a case study and people can help you cut your expenses.
Title: Re: Pay off IRS vs Maxing out 401k
Post by: Zikzin on June 23, 2015, 12:47:30 PM
It was an audit from previous years return, we used to have a business that we no longer have. Interest is about 3%
Title: Re: Pay off IRS vs Maxing out 401k
Post by: Zikzin on June 23, 2015, 12:52:42 PM
Were on debt repayment mode right now, we started at about $120k in 2013 now down to $79k, next year we plan to pay off our car which is $12k and the tax bill which is $19k. We had to pay $4k in taxes last year that's why I had to ask if putting some money in pre tax will be better than using all extra money towards debt
Title: Re: Pay off IRS vs Maxing out 401k
Post by: MDM on June 23, 2015, 12:59:12 PM
Assuming your 2 children are <17 years old, you will save ~30% in federal tax (plus whatever your marginal state tax is) this year for every dollar you contribute to a traditional 401k.

Perhaps best would be to maximize the 401ks for a total of $36K, then adjust your withholding so you get no refund (and owe no payment) in April 2016.  Then use the extra cash flow from the lower withholding to prepay the highest interest debt.

Would that work for you?
Title: Re: Pay off IRS vs Maxing out 401k
Post by: forummm on June 23, 2015, 01:04:27 PM
Assuming your 2 children are <17 years old, you will save ~30% in federal tax (plus whatever your marginal state tax is) this year for every dollar you contribute to a traditional 401k.

Perhaps best would be to maximize the 401ks for a total of $36K, then adjust your withholding so you get no refund (and owe no payment) in April 2016.  Then use the extra cash flow from the lower withholding to prepay the highest interest debt.

Would that work for you?

+1
Title: Re: Pay off IRS vs Maxing out 401k
Post by: Zikzin on June 23, 2015, 01:06:08 PM
Would that also work if only one of us has access to 401K? So instead of $36k, we can only shelter $18k
Title: Re: Pay off IRS vs Maxing out 401k
Post by: MDM on June 23, 2015, 01:11:07 PM
It would mean saving 30% on $18K instead of $36K, but otherwise the procedure (and results) would be identical.
Title: Re: Pay off IRS vs Maxing out 401k
Post by: Zikzin on June 23, 2015, 01:15:12 PM
Thanks so much MDM!