It’s a great paradox of life that people will clip coupons, or drive out of their way to save $5 at a sale and yet, when it comes to their personal finances, they ignore the chance to save thousands of dollars. This opportunity is real: it is the employer-sponsored retirement plan.
Participating in – or increasing contributions to – a 401(k), 403(b), 457(b), Simple IRA, SARSEP, or a Single K reduces taxable income. To quantify the value of this on a federal and state tax level let’s look at a NY resident earning $50,000.
After-tax income on this salary would be $38,856. Now, if a 10% contribution is made into the retirement account (or $5,000) the federal and NY tax savings would amount to $1,560, making the real cost of the contribution just $3,440.
In other words: $5,000 of investments would actually cost just $3,440.
Assuming a 24-paycheck year, this contribution would only cost $143 per check.
I am not even factoring in the value of the account compounding without the effect of taxes until retirement, or the added benefit some people get in the way of an employer match.
My last two blog posts, A Plan to Overcome Panic Paralysis and Destination Unknown? highlight the importance of defining your goals and making a financial plan to get there. Contributing as much as you can to your retirement is a critical first step.
If you are suffering from a tax-day hangover, take special note. Making a large contribution to your employer-sponsored retirement account can be particularly beneficial to you. Remember: income, not wealth, is taxed.
Even if your tax bracket isn’t a main concern, the truth is paying less for something worth considerably more (and that can appreciate in value) is a bargain too good to pass on.