401K and Income Taxes (Full Version)

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christsstar -> 401K and Income Taxes (7/16/2008 5:37:55 PM)

I know that money going into a 401k account is tax-free (unless it's a Roth).

I think I remember seeing, when I did my income taxes this year, that any contribution made to a 401k account is tax-deductable. Is that correct?

So if I sell some stock options, and then deposit all the money into my 401k, just to give it a head-start on earning, I won't pay taxes on that? Or at least significantly less????



GroupW -> RE: 401K and Income Taxes (7/16/2008 7:29:20 PM)

Technically, it's tax-deferred - meaning you pay taxes eventually when the funds are withdrawn. You wouldn't get a deduction on your taxes for it - 401k contributions reduce the amount of taxable income that's reported on your W-2 each year.

I assume you have a cashless exercise program for your options at work. In that case, usually your stock option proceeds flow through your payroll system. You'll pay taxes on the proceeds, and depending on the way your plan is set up, you can do a one time contribution of the net amount up to a maximum of $12k (more if you're over 50). You pay taxes on the stock option amount, but the 401k contribution reduces your taxable income. Your overall tax burden is less for the year, but yes you do have to pay taxes on the option proceeds.

Note: there are all sorts of tax rules that can come into play depending on whether the options are qualified or nonqualified, etc. Talk to your HR group before you make any firm decisions.
-BT



Miss Giggles -> RE: 401K and Income Taxes (7/16/2008 7:47:56 PM)

Contributing to a 401k lowers your taxable income

A Roth is NOT a 401k. A roth is an IRA

You can only contribute to a 401k via your current or former employer

You can contribute to an IRA at any time up to the max (4000 a person?, might be 5000)

If you sold stock, you might pay taxes on it. You would have to figure out gains/losses you have

You're not going to avoid taxes either way. The government doesn't let you get around it. You pay taxes on all sources of income. Its just a matter of paying it now or later.

HR will NOT help with investing. They will refer you to the plan administrator. In large companies its an investment company like Fidelity.

Don't sell stock now. Stock market is down. Buy low, sell high.



christsstar -> RE: 401K and Income Taxes (7/16/2008 8:32:21 PM)

I just got out of my 401K meeting, we have a Roth 401K option.

Regarding stocks: I have options through work I can exercise if I choose. I have a limited number of them and they expire after a given number of years with the company.

I understand the tax deferred thing.
I guess my question is ... if I sell my stock options to get my 401K some decent money in it, will I still get taxes on my stocks this year?????? IE .. I sell stock, my income goes up, I put it all in 401K, my income goes down the same amount. My annual income then didn't change NET, right?

My HR dept will give me information and direct me to teh right people. And I have those emails already. I can't do anything with a 401K until mid-august anyway because we're switching over to a different managing company and we'll be blacked out for a couple weeks.



christsstar -> RE: 401K and Income Taxes (7/16/2008 8:33:41 PM)

Oh, and to answer teh question about how my company does stock options:
I call Schwab, tell them how many I want to exercise, they call my finance dept and verify the number I'm eligible to exercise, they give me a check. I came in a $xx.xx, and if I sell above that, I get the difference. Only a fool would sell below that.

I'm trying NOT to sell my options, but am thinking it might help with my 401k since my options will expire.



Miss Giggles -> RE: 401K and Income Taxes (7/16/2008 8:42:41 PM)

Sorry I forgot about the roth 4o1k option. Ignore me [:D]

I am not too familiar with how those work. I don't think you get taxed twice though.



GroupW -> RE: 401K and Income Taxes (7/18/2008 7:22:32 PM)

quote:

ORIGINAL: christsstar

Oh, and to answer teh question about how my company does stock options:
I call Schwab, tell them how many I want to exercise, they call my finance dept and verify the number I'm eligible to exercise, they give me a check. I came in a $xx.xx, and if I sell above that, I get the difference. Only a fool would sell below that.

I'm trying NOT to sell my options, but am thinking it might help with my 401k since my options will expire.


That would the be cashless exercise I was talking about. I believe those normally flow through your normal payroll process. They'll withhold taxes at your normal withholding rate. You'll pay any additional tax due when you file your return next April. Depending on what you normally have withheld, the amount of the option profit, your general tax situation, etc., you could owe the IRS a bit of additional tax over and above what was withheld. If your payroll system allows a lump sum contribution to the 401k, you should be able to reduce your taxable income by a similar amount as the option profit.

Big caveat coming - UNLESS you put it into a Roth 401k. That is funded with post-tax dollars.

Again, I'd talk with your HR group to get the full scoop. There are too many potential pitfalls with AMT, etc.



christsstar -> RE: 401K and Income Taxes (7/18/2008 8:56:06 PM)

So you think that I could sell my options and have my payroll dept have them go straight to my 401K????

I don't remember seeing that on my option packets. Interesting. I will look into that.

My HR dept is a single person who, frankly, I think doesn't know what she's talking about half the time. She's still fairly new with the company. BUT ... I bet my finance dept my have some answers with that. They are the people we talk to regarding our options.

Usually with options, when we get the check (no taxes yet withheld, they get you on that the following year), the check comes directly from Schwab.



rhippie -> RE: 401K and Income Taxes (7/18/2008 10:06:06 PM)

quote:

ORIGINAL: christsstar

So you think that I could sell my options and have my payroll dept have them go straight to my 401K????

I don't remember seeing that on my option packets. Interesting. I will look into that.

My HR dept is a single person who, frankly, I think doesn't know what she's talking about half the time. She's still fairly new with the company. BUT ... I bet my finance dept my have some answers with that. They are the people we talk to regarding our options.

Usually with options, when we get the check (no taxes yet withheld, they get you on that the following year), the check comes directly from Schwab.


I would be very surprised if that were an option available. There are limits on the amount of money that can be placed into a 401(k)



christsstar -> RE: 401K and Income Taxes (7/18/2008 10:26:59 PM)

quote:

ORIGINAL: rhippie

quote:

ORIGINAL: christsstar

So you think that I could sell my options and have my payroll dept have them go straight to my 401K????

I don't remember seeing that on my option packets. Interesting. I will look into that.

My HR dept is a single person who, frankly, I think doesn't know what she's talking about half the time. She's still fairly new with the company. BUT ... I bet my finance dept my have some answers with that. They are the people we talk to regarding our options.

Usually with options, when we get the check (no taxes yet withheld, they get you on that the following year), the check comes directly from Schwab.


I would be very surprised if that were an option available. There are limits on the amount of money that can be placed into a 401(k)


15K per year.
Seeing as it's the end of the year, I don't know if I'd hit that limit as I haven't put any money into any 401k yet.

If I were to sell in November, as our stock price stays where it is right now, I would get less than $5000. Ideally, I wouldn't sell until I could get more than that. But it's something I'm thinking about.



blessedinnyc -> RE: 401K and Income Taxes (7/20/2008 12:18:34 PM)

quote:

ORIGINAL: christsstar

I know that money going into a 401k account is tax-free (unless it's a Roth).

I think I remember seeing, when I did my income taxes this year, that any contribution made to a 401k account is tax-deductable. Is that correct?

So if I sell some stock options, and then deposit all the money into my 401k, just to give it a head-start on earning, I won't pay taxes on that? Or at least significantly less????

That's correct, although I would add that there are a few exceptions to the tax-exempt rule.

If you put a Master Limited Partnership (many oil pipelines, timber companies, and a few random refiners are structured as MLPs), you have be careful. In that case, some of the income may be taxable.



GroupW -> RE: 401K and Income Taxes (7/21/2008 3:47:39 PM)

quote:

ORIGINAL: christsstar

So you think that I could sell my options and have my payroll dept have them go straight to my 401K????

I don't remember seeing that on my option packets. Interesting. I will look into that.

My HR dept is a single person who, frankly, I think doesn't know what she's talking about half the time. She's still fairly new with the company. BUT ... I bet my finance dept my have some answers with that. They are the people we talk to regarding our options.

Usually with options, when we get the check (no taxes yet withheld, they get you on that the following year), the check comes directly from Schwab.



Usually not straight through. The options under a cashless exercise program woud be paid to your checking account. The 401k investment would be deducted from that according to your normal payroll cycle / contribution policy. You'd probably be sitting on some cash for a short time.



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