
Originally Posted by
Melonie
^^^ insufficient data re the 'straight' job. By the letter of the law, employee tip income now has to be reported through the employer's payroll system, an the employer must withhold taxes from the declared tip income on the employee's behalf. Some employers in this situation force all tipped employees to 'share' tip income equally via turning in every dollar earned in tips on a daily basis and then being paid out an 'average' in the weekly paycheck. In both cases it will not be necessary to play games with W4 deductions.
There is a potentially major problem if you will be working at a 'straight' job and still earning money from featuring / dancing. This problem stems from the fact that the employer's accountant will calculate withholding based solely on your 'employee' income, whereas adding business income will kick the 'employee' income into a higher tax bracket leaving you underwithheld.
As to 401k's these are employer sponsored retirement plans which allow employees to contribute money out of their paychecks to the plan without having to pay income taxes on the contributed money. The tradeoff of course is that withdrawing this money at retirement age will cause income taxes to come due on the money being spent out of the retirement plan. Some 401k plans also include an employer matching contribution i.e. for every dollar the employee contributes the employer also contributes a dollar. If you have a matching 401k plan, this amounts to 'free money' thus it's a no brainer to make the maximum employee contribution that the employer will match.
IRA's are a private version of the 401k. Same situation re contributed money being tax deferred until you withdraw and spend it. Also, I didn't mention earlier that withdrawing money from an IRA or 401k BEFORE reaching retirement age not only causes income taxes to be due and payable immediately, but also triggers penalty charges (which I think run 10% of the balance).
Roth IRA's are a special variant of a regular IRA. The contributed money to a Roth IRA is after tax, meaning that you don't save any money off your yearly income tax bill by contributing. However, since this money has already been taxed, there are no additional income taxes due when you retire and start withdrawing and spending Roth IRA money. Interest earnings however are allowed to compound tax free over the years.
All of these gov't sanctioned retirement plans involve an element of 'risk'. The risk is that the gov't still has their 'hooks' attached to the money in these retirement funds, and can change the retirement fund rules or tax rules applying to retirement fund money at any time. It basically boils down to making a 30 year 'bet' that the tax savings available from contributing to these retirement funds now will be greater than the tax bill (or other retirement benefit losses) that will come into play 30 years from now when you retire.
Lots of people won't agree, but the only type of gov't sanctioned retirement fund that I can readily recommend is a 401k that has matching employer contributions. IMHO any other gov't sanctioned retirement fund is too vulnerable to future rule changes and tax changes to be worth making a 30 year one way bet on. Some of the proposed changes could have MAJOR future ramifications ...
- Social Security Means Test ... if you have saved your own money for retirement via a gov't sanctioned retirement plan, you won't need or get a Social Security
check.
- Flat Tax / Fair Tax ... if the current income tax is replaced with a de-facto national sales tax, money withdrawn from gov't sanctioned retirement accounts and spent in the future will be subject to a 21% federal sales tax. If that happens to be Roth IRA money, which was already taxed at whatever percentage the current income tax proposes in the year that it was contributed, a double taxation will result i.e. a 40-50% total tax rate. If it is 401k or IRA money, then the 21% flat tax 30 years from now must be measured against whatever percentage the current income tax would have collected now if the money wasn't contributed and subtracted as an adjustment to gross income (which could be anywhere between 15% and 31%)
Bookmarks