Hey guys,
I have been lurking here and posting on a few different user names over the years, but this is my first real contributing post. I just wanted to add something back to the community.
This is a PSA about how 401k contributions can actually make you a lot more money than you'd think by reducing your taxable income.
Let's say for example I am an Illinois resident and my salary is $100k (just to pick a round number). My monthly take home pay each month after taxes, social security, and medicare (assuming no special considerations like tax-exempt status) is $5688.52.
Now let's say that I decide to contribute $10,000 this year to the company 401k plan. When my employer calculates my paycheck for withholding purposes, my taxable income is now $90k. My take home each month is now $5173.02.
"Wait a minute," you might say, "that's only a few hundred dollars less than before." Right! The difference is only $515.50. That works out to $6,186 a year. But we were withholding a whole $10k in the 401k. The 401k tax deduction basically conjured up $3,814 out of thin air.
If I were to max out my 401k contributions now to $18k, the difference is even greater. I would have a taxable income of $82k and end up with a an extra $6726.00 at the end of the year.
If you want to follow along with me here, I am using the Paycheck City salary calculator here and doing the following calculation.
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First, get your take home pay assuming no 401k contribution by plugging your gross income into the salary calculator.
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Take your 401k contribution, subtract it from your salary. Plug that number into the salary calculator.
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Subtract the second number from the first number, multiply by 12.
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Subtract the result from your 401k contribution.
Note that none of this presupposes you have an employer match. I knew that 401ks were a good deal before doing this little exercise, but I thought a lot of that had to do with it being an employer matching program. I'm frankly surprised at what a good deal 401ks are even without it. I started this research when considering if I should max out my 401k even though I don't get an employer match. Even without the match, it's a great deal.
To summarize, 401ks are basically a way of getting free money, even if you get no employer match, by reducing your taxable income.
Also note: if you don't have a 401k plan, you can make tax-deductible IRA contributions up to $5500. So even if you are just working a part-time job or waiting tables, you can still use the magic explained above to make extra money appear.
Edit: formatting
Edit2: formatting again, everything was broken after c&p'ing from the original post that the bot took down
Submitted June 23, 2017 at 09:59AM by Buttman222 http://ift.tt/2rYUrcb
