The Win/Win of Pre-Tax Contributions: How to Plan for Your Retirement and Take Home More On Each Paycheck

I know, I know—the last thing you probably want to hear is another spiel about how important it is to prepare for retirement. It’s not that you take this subject lightly; it’s just that the closer you get to it, the more you are bombarded with reminders about how you absolutely, positively must start doing something about it immediately!

The problem is that, for however near or far off your retirement actually is, it always seems distant—something that you will deal with when you get there, but in the meantime is just one more thing to worry about. But what if we told you there was something that you could do right now that would not only help bolster your retirement funds, but will also save you money in the meantime? I’m talking about pre-tax contributions. Most employers that offer a 401k program whereby a small percentage of your income is directed to a fund which will grow over time. Often, these plans will match a percentage dollar-to-dollar with what you put in. Here is a helpful example of how this plan can work for you (provided via Investing Answers):

Let’s say that you earn around $1000 per pay period. Your tax rate is 25%, meaning you take home $750. Now, let’s say that you put $200 of that remaining sum into a savings account: you’re take home pay is $550. However, if you had put that $200 into your 401k, rather than a savings account, your taxable income suddenly become $800 out of that initial $1000. This is because, your 401 contribution is counted as pre-tax dollars.

You can see how this will save you money in the long-run as well as the short-run: your take home pay now becomes $600! This is one of those rare cases in the world of taxes and savings that we call a ‘win/win’. You take home a little bit more, and you contribute to your retirement at the same time. Contact your 401 administrator and ask them to provide you with the information needed to begin this process.