My company matches my 401k contributions, up to a limit, 6%. I don't currently contribute the max, but I would like to start. I know when I increase the W4 allowances, my take-home pay goes up, and the opposite is true when I increase the amount contributed to my 401k. I want to net take-home pay to remain the same. Is it a good idea to increase the number of W4 allowance I am claiming in order to contribute more to my 401k? How will this affect the amount of taxes I owe at the end of the year?

Edited for clarity: All else being equal, say I have my W4 allowances perfect to where I owe $0 and receive no refund at year end. If I add an allowance to my W4, I'll take home say $300 more per paycheck. If I contribute an additional $390 to my 401k (this is adjusting for the fact 401k contributions are pre-tax, keeping net takehome pay the same), will I owe more come year end?

  • Are you contributing to a Roth 401k or a Traditional 401k? – Dilip Sarwate Apr 7 '13 at 3:24
  • @DilipSarwate it is a Traditional 401k, that can be used to lower my adjusted gross income at year end. – Mark Apr 7 '13 at 14:46

What you propose puts you at risk to owe tax next April. If you are using the Traditional, pre-tax account, $100 you put in will reduce the tax withheld, so you might see $70 less in your check. By bumping the allowances you withhold even less.

If the employer is doing it right, the allowances don't change for the fact that your 401(k) changes deposits.

Edit - To clarify - Traditional 401(k) are withheld pretax. The effect is that my W2 reflects a box 1 Wages figure that is lower than either my Social Security wages or Medicare wages. All else being equal, 2 people with same number of W4 allowances, first has $60K income with a $10K 401(k) deduction, the second has $50K income. The federal tax withholding should be identical as payroll withhold on the same $50K for each.

My article on W4 withholdings may help explain this a bit more.

To specifically answer your last edited line, if your W4 is perfect, and you increase 401(k) deductions, aside from trivial anomalies, it should remain perfect.

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    My employer would not auto-adjust the allowances, this is something I would have to submit a new W4 form to have done. I will edit my question for clarity. – Mark Apr 7 '13 at 14:49
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    I've updated my answer. I still believe 'allowances' don't change, but withholding does. Payroll sees a lower income to tax. Circular E and all that. – JTP - Apologise to Monica Apr 7 '13 at 15:25

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