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Save more and pay less to the taxman

12/22/2009:

Two of the best things about a 401(k) are:

  1. The more you contribute typically the better position you will be for retirement
  2. You pay less tax to the government this year!

Let’s take a simple example and do the math. Let’s say you earn $100,000 and 25% or your earnings go to Uncle Sam. If you contribute 5% of your salary to your 401(k) account for this year that is $5,000 you saved for down the road. And now your taxable income is reduced to $95,000 before any other deductions you may qualify for. You pay $1,250 LESS in taxes just for contributing to your 401(k). To understand your specific tax situation better, it’s always a good idea to talk to a tax advisor.

And saving more won’t likely put you in a pinch

If you receive a paycheck twice a month, the impact to your take home pay is less than you might think. When you contribute 5% of pay to your 401(k), your take home pay in the example above is $3,958 each paycheck before taxes and other deductions you pay.

Now let’s increase your 401(k) contributions to 7%. Saving 7% of your salary means your paycheck would now be $3,875 per pay period, or $83 less per paycheck than saving 5% each check. But the good news is that you are now putting $292 toward your 401(k) each payday. That’s a pretty simple way to get on track and give yourself more financial options today and for when you reach retirement.

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