Understand that finance is new to me because I never had money. I do have a 401k with discretionary matching. I make a small contribution. Now I suddenly got $50,000 of taxable income. Is it a good move to increase my 401k contributions to lower my W2 income?
Got a windfall. Increase 401k contributions to help offset tax hit?
byu/lucillep inpersonalfinance
Posted by lucillep
4 Comments
Sure, that’s fine.
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Sounds like you are asking about a framework for what to do with money.
Start with reviewing the Prime Directive in the PF Wiki. It will answer your question and many other questions you didn’t realize you should be asking.
* https://www.reddit.com//r/personalfinance/wiki/commontopics
Does this mean the inheritance is from a IRA or 401k? In both those cases the money flows into a inherited account where you have 10 years to liquidate.
Generally windfalls are not taxable income when received. Whatever taxes which are needed to be assessed is on the giver’s end.
But yes if you increase your traditional 401k contributions you lower your taxable income, thus reducing your taxes in the year you made the contributions. It is a good way to reduce your taxes if the windfall enables you to comfortably increase your contributions.
If your income for the year is below the Traditional IRA phase outs (for 2026 $81,000–$91,000 (single) or $129,000–$149,000 (jointly)) you can make contributions there and make the deduction to reduce taxable income.
With the 401k and tIRA that is $24.5k + $7.5k = $32k out of the $50k of the inheritance moved to tax advantage space and eliminated from income tax considerations.
Edit: Just read in another comment the inheritance is from an annuity, so yeah the beneficiary has to pay ordinary income tax on the amount received.
So $50K is your total income? At this level you are paying the lowest tax already. SO while saving is good, I cant see any real advantage here.