Easing the Bite of 401(k) Contributions
We all know we should be contributing as much as we possibly can to our 401(k)s. There's really no excuse not to. No matter how well you do with your other investments, you're unlikely to beat the 401(k)s advantages of tax-deferred growth and a company match. The bottom line: Max out.
So why don't we do it? Well, we've got tuition bills, car-loan payments,
credit-card debt, medical bills, mortgages, etc., etc., etc. Fact is,
most of us really don't want to see our paychecks shrink any further — even
if it's going to give us a more comfy retirement. That's why we developed
this 401(k) contribution calculator. If you really crunch the numbers,
the results may pleasantly surprise you. What most people don't realize
is that increased contributions usually mean lower federal and state
income taxes. Why? Because all or part of your increased contributions
will generally be deducted from your taxable salary. What's it mean?
The net amount in your paycheck may actually decline by a good deal less
than the additional amount you choose to contribute.
There are a few things to remember, however.
First, your 401(k) pay-ins — termed "salary reduction contributions" or "elective
deferrals" by tax wonks — remain subject to Social Security
and Medicare taxes, which are 7.65% of your salary up to $94,200 for
2006 and 1.45% after that.
Also, pretax contributions for 2006 are limited to no more than $15,000
($20,000 if you will be age 50 or older at year-end) although your plan
may impose a lower limit based on a percentage of your salary. That said,
some employers also allow you to make after-tax contributions above the
applicable percentage limitation. But beware: These types of contributions
will reduce your take-home pay dollar for dollar. For example, say your
salary is $115,000 and your plan allows you to contribute up to 15% of
compensation. If you contribute the full $17,250, the last $3,250 will
be with after-tax dollars because you have exceeded the federal $15,000
salary-reduction limit. Our calculator takes this factor into consideration.
And since you are still able to defer taxes on the earnings generated
by these contributions, making after-tax contributions isn't a bad idea
(assuming you can afford it).
Go to the Contribution Calculator
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