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Why should I contribute to a 401(k) retirement savings plan?

Reason #2:
You can reduce your current tax obligation, because federal and most state income taxes are deferred on your contributions until they are withdrawn

 

Take Home Pay

A 401(k) plan is a retirement savings plan which allows you to set a side via payroll deductions a portion of your pay in a tax sheltered retirement fund.

 

Example

Deferral % represent the amount being deducting from the paycheck. Notice that as you increase the deferral percentage, the federal and state tax is reduced.

View the example below.



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Deferral %

0%

5%

8%

10%

15%

Gross Pay

$35,000.00

$35,000.00

$35,000.00

$35,000.00

$35,000.00

-Pretax Deferral

$0.00

$1,750.00

$2,800.00

$3,500.00

$5,250.00

Taxable Gross Pay

$35,000.00

$33,250.00

$32,200.00

$31,500.00

$29,750.00

-Social Security

$2,677.50

$2,677.50

$2,677.50

$2,677.50

$2,677.50

-Federal Tax

$5,200.00

$4,727.00

$4,444.00

$4,255.00

$3,782.00

-CA State Tax

$1,206.16

$1,066.16

$994.36

$952.36

$847.36

Take Home Pay

$25,916.34

$24,779.34

$24,084.14

$23,615.14

$22,443.14

Deduction Net Pay

$0.00

$1,137.00

$1,832.20

$2,301.20

$3,473.20