Putting money in a 401k is a smart tax-saving money move. The Government allows us to sock away up to $17,000 of our hard-earned pay and not pay income tax on it (up to $17,500 in 2013). The money in the account grows without making you pay taxes like a regular investment-type account would, you just have to pay taxes as you start to withdraw money out of the account at retirement.
In this audio lesson I use the example of a married couple, we’ll call them Joe and Suzy. To make it easy we pretend they have no kids, no other deductions and he is the bread-winner making $50,000 a year (paid every other Friday). This would put them in the 15% tax bracket (thru 2012).
Americans that doen’t save into a 401k or IRA
Joe would pay $7,500 in income taxes, leaving them $42,500 and no 401k savings.
The American that saves 3% of their income in a 401k
Each paycheck Joe takes $57.69 and has it automatically put into the 401k account. This reduces his take-home pay, but not by as much as you would think. Reducing their take-home pay to put money into savings means they have $41,225 to live off of.
Joe may have put $57.69 into the 401k every-other week but he only reduced his take-home pay by $49.03. That is because the money that is going into the 401k is pre-taxed. They enjoy lower taxes while putting money into savings.
The American that gets a match at work
If Joe’s employer matches his 401k contributions then he still enjoys saving on taxes. Instead of saving $1,500 into his retirement plan he will have $3,000 by the end of the year. That’s a deal!
Could you live on $100 less a month in order to save $3,000 a year? Talk with your employer’s benefits department to see if they have a 401k and take advantage of it! Your employer wants you to and it is a smart money move.
If you are just getting started
There are other things to take into account when saving for retirement. What if you don’t have a 401k at work or they don’t offer a match? You have other options to consider.
I recommend getting expert advice when making these decisions. Contact me if you want to expand your knowledge on how saving for retirement will effect your taxes, monthly budget, debt elimination plan, and outlook for your future. It would be my honor to help you!