[USER]

Hello, looking for guidance. who is singing anonymously because this is sensitive and I know people in this group.

My daughter will have made her first six figure income in 2024. With bonuses I think it will probably be close to $120,000. She is contributing I believe 10% to her 401(k) plan.

I’m worried she may have a huge tax bill. What can she do last minute to avoid a big tax hit?

She does have a Roth that she opened this year as well.

if she does contribute to the Roth to lower her tax bill, will she be able to access that money in the near future?

[Jeremy]

Are you concerned that she did not withhold enough income during the year?

[Brian]

Roth IRA does not lower tax bill. A traditional IRA will lower the tax bill.

Best thing you can do for your daughter is buy her some books. The Simple Path to Wealth is a great one to start.

Then stand back and get out of the way because she won’t learn and grow if you do all the thinking for her.

[Poley]

Is she not having taxes withheld? Bonuses have taxes withheld higher (closer to 40%) so as long as she is having enough withheld there will be no tax bill.

When I was making similar I got a refund at the end of year and the same making 75k

[Jodi]

I would recommend that she goes to the IRS website and estimate her tax burden based on her pay and withholdings.

Last year, I had to pay in a significant amount (for me).

I had never had to pay in more than $1,000 in the past and I was shocked at what I owed.

After that, perhaps people here can give advice.

[Megan]

Congratulations on your daughter’s success.
Are you and your daughter both aware that tax brackets are incremental, not all in?

Her income is likely higher than would allow her for tax free traditional IRA deductions and having a balance in a traditional IRA would quickly create issues when she starts needing to backdoor Roth IRA contribute.

She had a good year financially, even without a tax deduction maxing out her Roth IRA is a smart thing.

Contributions are finite each year.

This sounds like a good opportunity for her to reassess for next year how much she contribute to her employer plan assuming that at 10% she isn’t already maxing out.

Does she have an HSA?

[Charlotte]

Why are you concerned? Her work should be withholding according to her pay rate and her W4.

[Tammy]

If she is single, the portion of her taxable income, if any, over $100,525 will be taxed at 24% instead of 22%.

With the standard deduction of $13,850, if her income is $120,000, only $5,625 would be subject to the additional 2% income tax (24% vs 22%), which is $113.

Contributions to a pretax 401K reduce taxable income, so if she contributed 10%, then very little of her income will push into the 24% rate bucket.

If she’s contributing to a Roth 401k, a portion will be taxed at 24%, but that’s OK.

This is nothing to be concerned about. Take a little time to understand marginal tax rates.

[Erin]

Roth doesn’t lower your tax bill. It’s after tax dollars. Is she having taxes taken out of her paycheck?

What did she claim on her W-4?

[Sean]

I’d recommend the choose fi podcast and maybe simple path to wealth by JL Collins or I will teach you to be rich by Ramit Sethi.

Sounds like you and she should focus on learning about finance.

It could be something fun to do together. But as others have said traditional 401k lowers taxes a “Roth” which isn’t an account, but I’ll assume you mean Roth IRA, uses post tax dollars that are not taxed on withdrawal, so it doesn’t save any taxes now.

Retirement accounts are meant for saving for retirement and not designed to be accessed in the “near future”.

It looks like she’ll only be in the 22% bracket which really isn’t bad.

Depending on her state/local taxes it may make sense for her to lean towards Roth mainly.

[Jessica]

If the goal is to reduce a tax burden, I’d focus on maxing all tax advantaged accounts.

She can max out her 401k and if she has access to an HSA, that would be great to max as well

[Goska]

If she needs to pay a lot of taxes in April, maybe she should consider getting a credit card with travel points.

[Author]

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