When you contribute to the 401(k) with pre-tax dollars, your annual taxable income goes down – up to $23,500 in 2025! That means more of your money is actually going to you. And you’re eligible for the valuable company match.
Don’t think you can afford to save in the 401(k) plan? Well think again! In fact, more of your hard-earned money will be going in your pocket when you contribute. Here’s an example. Bill earns a salary of $50,000 per year and has an effective tax bracket of 20%. Assuming no other pre-tax contributions, and a company match of 50% on the first 6% of pay, Bill’s income with and without contributing 6% to the 401(k) is:
| |
Bill Doesn’t Contribute |
Bill Contributes 6% of Pay |
| Salary |
$50,000 |
$50,000 |
| Pre-Tax 401(k) Contribution |
|
$3,000 |
| Taxable Income |
$50,000 |
$47,000 |
| Income Tax (20% of taxable income) |
$10,000 |
$9,400 |
| After-Tax Income |
$40,000 |
$37,600 |
| Company Match |
|
$1,500 |
| Balance in Bill’s 401(k) account |
$0 |
$4,500 |
As you can see, Bill comes out ahead when he contributes to the 401(k) plan. By making a $3,000 contribution to his account, he gets a total contribution of $4,500 with the company match and his take-home pay only is reduced by $2,400 because of the tax savings. Of course, any contributions to his 401(k) plan cannot be used until he retires or reaches age 59 ½ (without penalty).
This is an illustration only. Your actual calculations will depend on your salary, tax rate and other pre-tax contributions. Be sure to consult with a tax professional to discuss your personal situation.