This tax season, I was quite surprised when I found out we weren’t getting the $5,000 tax refund we got last year. Actually, we owe about $1500 (federal). What happened?
1. We (combined) earned about $X0,000 more from 2005 to 2006 because of various raises and job changes
2. We didn’t have as many deductions to lower our taxable income
Some of my own history
I worked with my first employer out of college for 4 years. I contributed to my 401k for a few years, but I was in so much debt, I had to stop contributing in order to pay down the debt (that’s a topic for another post though).
I left that employer in 2005 for another employer for 5 months (they got acquired). I didn’t contribute to their 401k for some reason, but I wouldn’t have vested in their match anyway.
I left employer #2 for employer #3 at the end of 2005. I contributed to #3’s 401k for 9 months, but left for my current employer one year ago, which brings us to the topic of this article…
What if your employer doesn’t match your 401k contributions?
When I started with my current employer, I found out they had a 401k, but didn’t match my contributions for the first year of my employment. I thought “Why would I want to contribute if I don’t get that free money?”.
Answer: Because I could have saved a bunch of money on taxes and may have even gotten a refund!
I figured that if I didn’t contribute until my first year, I could use that extra money to pay down my debt. This time, unlike during my first employment period, I DID actually use that money to pay down about $6,000 or so in debt. But not everyone has that discipline. I didn’t have it the first time around.
The Moral of the Story
Had I contributed enough pretax dollars to my 401k last year, I would have gotten a refund instead of almost paying a penalty for not paying enough federal taxes. When did I learn this? A few weeks ago when I filed my tax return.
But now that I’ve been at my employer for a year (next month), I’ll both start contributing AND my employer will begin matching contributions.
Have any of you been in my situation? Did you have the discipline to use your investment dollars towards paying down debt? Should I have even used that money for debt rather than retirement?