Because your contributions are made from pretax income, you actually reduce your current income tax bill. Compared with taxable investments outside your plan, contributing to your workplace savings plan can increase your take‑home pay!

 

Contributing can increase your take‑home pay

 

                                                                                    Pretax plan                         Taxable outside plan

Annual gross salary                                                   $30,000                                         $30,000

 

6% pretax contribution                                               ‑$1,800                                              $0

 

Taxable income                                                           $28,200                                         $30,000

 

Less 27% federal income tax                                    ‑$7,614                                          ‑$8,100

 

6% after‑tax contribution to a                                        $0                                              ‑$1,800

taxable account outside the plan

(from gross salary)

 

Take‑home pay                                                           $20,586                                         $20,100

 

Annual difference

in take‑home pay                                                          $486

 

This chart assumes that the employee is married and that the standard deduction and personal exemptions have already been taken into account in the spouse’s salary. State and local income taxes may also be withheld.

This chart is provided by Fidelity Investments, 1-800-343-0860.