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You don't have to invest your contribution in stocks, you could buy some inflation-protected bonds or even keep it in cash.
Regardless of matching, if you are right on the margin in terms of federal income tax brackets, you can lower your effective tax rate, which puts MORE money in your take-home pay.
For example, let's say you're making 34,000 / year, well, your effective tax rate is 25%, or $8,500 / year (or $708 per month). Ignoring other taxes, you take home $2,125a month.
Okay, now if you take out 5% of your paycheck and put it in a 403B/401K (for the sake of argument, in cash). Then you're now making $32,300 / year. That puts you in the 10% tax bracket, which means you pay 3,230 / year in taxes (or $269 per month). Your take home pay is 2,422 a month
Oh, and you're saving even more because that 5% (or about $141 per month) is tax-free as long as you keep it in there until you're old
Hope TVSG reads this..apparently he can have his Doritos and eat them too!! More cash in pocket means more ESPN, and other TVSG amenities
You don't have to invest your contribution in stocks, you could buy some inflation-protected bonds or even keep it in cash.
Regardless of matching, if you are right on the margin in terms of federal income tax brackets, you can lower your effective tax rate, which puts MORE money in your take-home pay.
For example, let's say you're making 34,000 / year, well, your effective tax rate is 25%, or $8,500 / year (or $708 per month). Ignoring other taxes, you take home $2,125a month.
Okay, now if you take out 5% of your paycheck and put it in a 403B/401K (for the sake of argument, in cash). Then you're now making $32,300 / year. That puts you in the 10% tax bracket, which means you pay 3,230 / year in taxes (or $269 per month). Your take home pay is 2,422 a month
Oh, and you're saving even more because that 5% (or about $141 per month) is tax-free as long as you keep it in there until you're old
While an 401b/k is an good idea, your math about taxes is all wrong.
These are '07 numbers but the idea is the same: You will never have less take home pay because of hitting a new tax bracket.
Single:
$zero - $7,825 is taxed at 10%
$7,825 - $31,850 is taxed at 15%
$31,850 - $77,100 is taxed at 25%
$77,100 - $160,850 is taxed at 28%
$160,850 - $349,700 is taxed at 33%
over $349,700 is taxed at 35%
Married, Filing Jointly:
$zero - $15,650 is taxed at 10%
$15,650 - $63,700 is taxed at 15%
$63,700 - $128,500 is taxed at 25%
$128,500 - $195,850 is taxed at 28%
$195,850 - $349,700 is taxed at 33%
over $349,700 is taxed at 35%
If a single person makes $25000 a year
$7,825 taxed at 10% = $785.50
$17175 taxed at 15% = $2576.25
$25000 total taxes due = $3361.75 or 13.5%
While an 401b/k is an good idea, your math about taxes is all wrong.
These are '07 numbers but the idea is the same: You will never have less take home pay because of hitting a new tax bracket.
Single:
$zero - $7,825 is taxed at 10%
$7,825 - $31,850 is taxed at 15%
$31,850 - $77,100 is taxed at 25%
$77,100 - $160,850 is taxed at 28%
$160,850 - $349,700 is taxed at 33%
over $349,700 is taxed at 35%
Married, Filing Jointly:
$zero - $15,650 is taxed at 10%
$15,650 - $63,700 is taxed at 15%
$63,700 - $128,500 is taxed at 25%
$128,500 - $195,850 is taxed at 28%
$195,850 - $349,700 is taxed at 33%
over $349,700 is taxed at 35%
If a single person makes $25000 a year
$7,825 taxed at 10% = $785.50
$17175 taxed at 15% = $2576.25
$25000 total taxes due = $3361.75 or 13.5%
15% of $25000 would have been $3750
But if you cross over that line your rate of increase in your take home pay is not as dramatic so you see more of that money if you put it into a 401k and bring your tax bracket back down, you would be sacraficing a much smaller change in your pay check for a larger contribution to your 401k than if you had not crossed a tax bracked line. now if you got a raise well into the next tax bracked, like say 20k and were at a little over 100k then it would not matter but if you were at 82500 it would make sense to contribute to the 401k to get your bracket down so you are not paying 28% on ANY money.
You don't have to invest your contribution in stocks, you could buy some inflation-protected bonds or even keep it in cash.
Regardless of matching, if you are right on the margin in terms of federal income tax brackets, you can lower your effective tax rate, which puts MORE money in your take-home pay.
For example, let's say you're making 34,000 / year, well, your effective tax rate is 25%, or $8,500 / year (or $708 per month). Ignoring other taxes, you take home $2,125a month.
Okay, now if you take out 5% of your paycheck and put it in a 403B/401K (for the sake of argument, in cash). Then you're now making $32,300 / year. That puts you in the 10% tax bracket, which means you pay 3,230 / year in taxes (or $269 per month). Your take home pay is 2,422 a month
Oh, and you're saving even more because that 5% (or about $141 per month) is tax-free as long as you keep it in there until you're old
That is not how tax brackets work.
If you make $34k per year, you pay taxes like this:
10% on the first $8350 ($835)
15% from $8351-$33950 ($3840)
25% from $33951-$34000 ($10)
for a total of $4675.
If you drop down to $32300, you still pay 10% on the first $8350, and 15% on the rest.
You actually pay less than that because of deductions, but I am trying to be simple.
But if you cross over that line your rate of increase in your take home pay is not as dramatic so you see more of that money if you put it into a 401k and bring your tax bracket back down, you would be sacraficing a much smaller change in your pay check for a larger contribution to your 401k than if you had not crossed a tax bracked line. now if you got a raise well into the next tax bracked, like say 20k and were at a little over 100k then it would not matter but if you were at 82500 it would make sense to contribute to the 401k to get your bracket down so you are not paying 28% on ANY money.
I was not arguing against 40k/b plans, but stating how taxes really worked and correcting the idea of having less take home because of reaching a new bracket.
I happen to like 401k plans. I am up over 10% since the start of the crash. When everything was @ rock bottom I pumped money into it. That's on top of my company match. Not bad for a down market.
But if you cross over that line your rate of increase in your take home pay is not as dramatic so you see more of that money if you put it into a 401k and bring your tax bracket back down, you would be sacraficing a much smaller change in your pay check for a larger contribution to your 401k than if you had not crossed a tax bracked line. now if you got a raise well into the next tax bracked, like say 20k and were at a little over 100k then it would not matter but if you were at 82500 it would make sense to contribute to the 401k to get your bracket down so you are not paying 28% on ANY money.
True. With a 401K or 403B, you are reducing your gross taxable income, so the overall effect is that the money you set aside is sheltered at your highest tax rate. You would be saving 28% on any dollars you earn over $82250, but only 25% on any dollars between $33951-$82250.
I was not arguing against 40k/b plans, but stating how taxes really worked and correcting the idea of having less take home because of reaching a new bracket.
I happen to like 401k plans. I am up over 10% since the start of the crash. When everything was @ rock bottom I pumped money into it. That's on top of my company match. Not bad for a down market.
Agreed. Looks like our posts about tax brackets crossed. I am with you, in that I have been pumping any extra $ I get into my 401k. Even if stocks drop another 40% or so, I am breaking even, because I am simply down to my contribution, having lost the employer match.
I doubt that will happen though, so I am looking at it like buying stuff cheap before it goes up.
Hope TVSG reads this..apparently he can have his Doritos and eat them too!! More cash in pocket means more ESPN, and other TVSG amenities
Poor little Grasshopper has been totally flummoxed by all the input from experts whose language is just so way out there where he's concerned. He may retort with a LOL 4-year old retort just for the heck of it but I doubt even that as this whole discussion is so way beyond his reach.
Thanks for the info, contributors - I've learned a lot!
Above posters are correct, with 401k even if you are in same tax bracket when retired you'll pay less on taxes since all you put in would have come from top bracket while most when withdrawn would be taxed at zero or lower brackets. You're shifting the burden on the bulk of it because of tiered system.
Also = many 401ks offer some sort of guaranteed return fund that these days stomps all over interest rates from a savings account or even jumbo CDs. When money markets were returning over 4% these didn't have much utility but they actually look attractive now for some.
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