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How Will My 401(k) Deduction Affect My Paycheck?

how much comes out of my paycheck

Contributing to your 401(k) in your twenties can lead to financial security in retirement.

Pre-Tax Contributions

Your 401(k) deductions are made on a pre-tax basis, so your take-home pay won't be decreased by the same amount as your contribution. When you contribute to your 401(k), your total amount of taxable income is lowered, so you pay fewer taxes than you would if you didn’t participate. You’ll be taxed on your withdrawals when you hit retirement age or if endure financial hardship and need to take money out earlier.

Gradual Contributions

Most experts recommend putting at least 15 percent of your pre-tax income into your 401(k) for retirement. However, this can be difficult when you’re just starting out in your career and not making much money. Gradually increasing your contribution level is a good way to get to the savings level

where you need to be without really noticing the deduction from your paycheck. As your salary increases, raise your 401(k) contribution by a percentage or two to create less of an impact on your finances. Starting your 401(k) savings early, while you’re still in your twenties gives you an advantage over those who wait to begin contributing until their thirties. You may be able to save less money each month and realize the same returns, or even greater, thanks to compound interest on your funds.

Employer Match Program

If your company offers a 401(k) match program, contribute the maximum amount optimizes your benefits. For example, if your company matches 100 percent of your contribution up to 4 percent, don’t pass up this opportunity to boost your savings levels. This is essentially free money added into your retirement account.

Changing Contribution Levels

Category: Personal Finance

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