Saving for the New Year with a 401(k)

saving moneyEvery New Year millions of Americans resolve to save money. Every April millions of Americans file their taxes and look for ways to keep more money in their pockets. One way to accomplish both these feats is through a 401k plan. As published on 401k.com:

Investing money through your 401(k) plan gives you the benefit of tax-deferred saving. This lets you increase your take home pay and decrease your current taxable income. Remember though, your pre-tax contributions are not tax-free; they’re tax-deferred, which means that you don’t pay income tax on this money until you withdraw it from the plan (which should be at retirement, when you may be in a lower tax bracket). Take a look at a hypothetical chart to see how contributing to the plan compares with saving outside the plan (in an ordinary savings, or other taxable account).

Pre-tax savings in the plan

Saving in a taxable account outside of the plan

Annual gross salary

$50,000

$50,000

6 percent of pay before-tax contribution

-3,000

Taxable pay

47,000

50,000

Less a hypothetical 27 percent Federal income tax

-12,690

-13,500

6 percent regular annual savings in a taxable account outside the plan (from gross salary)

-3,000

Take home pay

$34,310

$33,500

Annual difference in take home pay

$810

*This hypothetical example is for illustrative purposes only. Taxes on pretax plan contributions as well as any earnings will be due at the tax rates in effect at the time you withdraw from your plan account.

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About HR Strategies

HR Strategies is a private human resource management firm created to enable small business owners to focus on their core competencies, rather than the tedium of running payroll, providing employee benefits, or the many other facets of human resource administration. We allow business owners to concentrate on their passion, without being distracted by countless human resource responsibilities.

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