Maxing 401k - small impact to take-home pay

[birdman2003]

For a long time, I invested 6% of my salary into my 401k (just enough to get the full company match).  This year I have increased it to 20%+ so that I will max out my 401k for the first time in my less than 10 year working career.

I was surprised that my take-home pay did not change as much as I expected it to.  I'm glad I did the 6% contribution while I was saving up for a house down-payment, but now that I have a house I have no reason to not max out the 401k.

[ArcadeStache]

I've actually been wondering how maxing out would affect the taxes taken out and thus take home pay. Could you share some numbers to illustrate?

[nereo]

congrats on maxing out your 401(k) contributions.  I'm guessing you are in a higher tax bracket?

One thing I've noticed is that many people never miss money that's taken out of their paycheck before it ever gets into their account. 

[birdman2003]

With monthly salary of $6500, I was putting 6% into my 401(k) ($390) and paying $1660 in taxes. Take home pay of $4450.

Now, with a monthly salary of $6500, and putting 25% into my 401(k) ($1625), I am paying $1350 in taxes.  Take home pay of $3525.

So my take home pay was reduced by $900 a month, but I am putting an extra $1200 a month into my 401(k).

Like nereo said, I don't even miss the $900 since it never reaches my checking account!

[nereo]

I've actually been wondering how maxing out would affect the taxes taken out and thus take home pay. Could you share some numbers to illustrate?

It's a pretty simply calculation.  Assuming you aren't right on the edge of a tax bracket, every dollar you put into your 401(k) will reduce that year's tax burden by that amount.  For example, if you make $74k/year (single file) you are solidly in the 25% tax bracket.  For every $1 you put into a 401(k) you reduce your tax burden that year by 25¢.  Contributing the maximum tax-deferred contribution of $18k would only 'cost' you $13,500 in tax-home pay. 

note: example edited to account for standard deduction

[NotJen]

I've actually been wondering how maxing out would affect the taxes taken out and thus take home pay. Could you share some numbers to illustrate?

It's a pretty simply calculation.  Assuming you aren't right on the edge of a tax bracket, every dollar you put into your 401(k) will reduce that year's tax burden by that amount.  For example, if you make $60k/year (single file) you are solidly in the 25% tax bracket.  For every $1 you put into a 401(k) you reduce your tax burden that year by 25¢.  Contributing the maximum tax-deferred contribution of $18k would only 'cost' you $13,500 in tax-home pay.

Small correction to this example... $60k doesn't put you solidly in the 25% bracket when you take into account the standard deduction and personal exemption.

Your basic taxable income will be $60,000 - $6,300 - $4,000 = $49,700.

If you contribute $18,000 to your 401(k), you are saving 25% tax on the first $12,250, and 15% tax on the rest ($5,750).  So, your $18k in this example "costs" $14,075.

[nereo]

I've actually been wondering how maxing out would affect the taxes taken out and thus take home pay. Could you share some numbers to illustrate?

It's a pretty simply calculation.  Assuming you aren't right on the edge of a tax bracket, every dollar you put into your 401(k) will reduce that year's tax burden by that amount.  For example, if you make $60k/year (single file) you are solidly in the 25% tax bracket.  For every $1 you put into a 401(k) you reduce your tax burden that year by 25¢.  Contributing the maximum tax-deferred contribution of $18k would only 'cost' you $13,500 in tax-home pay.

Small correction to this example... $60k doesn't put you solidly in the 25% bracket when you take into account the standard deduction and personal exemption.

Your basic taxable income will be $60,000 - $6,300 - $4,000 = $49,700.

If you contribute $18,000 to your 401(k), you are saving 25% tax on the first $12,250, and 15% tax on the rest ($5,750).  So, your $18k in this example "costs" $14,075.

ah, yes.  Right you are - my simple example was overly simplistic and neglected things like the standard deduction.  Edited example to fix.

[forummm]

I've actually been wondering how maxing out would affect the taxes taken out and thus take home pay. Could you share some numbers to illustrate?

It's a pretty simply calculation.  Assuming you aren't right on the edge of a tax bracket, every dollar you put into your 401(k) will reduce that year's tax burden by that amount.  For example, if you make $60k/year (single file) you are solidly in the 25% tax bracket.  For every $1 you put into a 401(k) you reduce your tax burden that year by 25¢.  Contributing the maximum tax-deferred contribution of $18k would only 'cost' you $13,500 in tax-home pay.

Small correction to this example... $60k doesn't put you solidly in the 25% bracket when you take into account the standard deduction and personal exemption.

Your basic taxable income will be $60,000 - $6,300 - $4,000 = $49,700.

If you contribute $18,000 to your 401(k), you are saving 25% tax on the first $12,250, and 15% tax on the rest ($5,750).  So, your $18k in this example "costs" $14,075.

ah, yes.  Right you are - my simple example was overly simplistic and neglected things like the standard deduction.  Edited example to fix.

And this ignores state taxes. So if the state tax rate is 6%, then putting another $100 in the 401k only drops your check $69.

[NextTime]

I wouldn't call 21% a small impact to take home pay.

But if you aren't missing it, good on ya. Sock away as much as you can.

[GGNoob]

I always use this calculator to see how it will affect my paycheck: http://www.adp.com/tools-and-resources/calculators-and-tools/payroll-calculators/salary-paycheck-calculator.aspx

[Brilliantine]

I always use this calculator to see how it will affect my paycheck: http://www.adp.com/tools-and-resources/calculators-and-tools/payroll-calculators/salary-paycheck-calculator.aspx

This. I came here to provide that link.

[Brilliantine]

Also, I am in a similar situation. I was contributing only the 6%; now I am playing catch up until the end of the year so yesterday I increased my contribution to 33%. I expect to get quite a significant drop in my takehome but definitely not 27% of my base.

[TheAnonOne]

Likewise, if your someone who is in the upper brackets (or married and in an upper bracket) the effect is even greater. When your in the 33% bracket, it doesn't feel like it does much at all to your take home...

[Dan_Breakfree]

My wife was only contributing 4% to her 401k before I started hanging out in the MMM forums last month, but now we've bumped it up to 50% so we can maximize her $18k contribution this year! We saw a pretty big hit in her paycheck, but we'll pay over $4k less in taxes and majorly bump up her 401k. Assuming we can get over the short-term thinking of a smaller paycheck, it's quite a win-win situation!

[Late_Bloomer]

The less tax paid is a nice little bonus that I never knew existed before I changed my savings rate. Now that the 401k's are being maxed, we're seeing an additional 600 per month. It really helps offset the amount we are stuffing in the savings accounts. 

[birdman2003]

I wouldn't call 21% a small impact to take home pay.

But if you aren't missing it, good on ya. Sock away as much as you can.

The first few paychecks I admit were tough pills to swallow until I slapped myself around and convinced myself that $900 a month is not a big sacrifice since it is going to savings, and not expenses.

Spending $900 a month is a big deal, but saving $900 a month is easy once you commit to it and you never see the money in your bank account.

[FLBiker]

It's amazing how big of a difference this makes in your taxes.  Last year, we paid ~$5800 in taxes on ~$110K in income (down to ~$63K after after maxing out both our 403bs and tIRAs).  That's like 5%!  And we live in a state & city w/ no income tax.  In 2012 (before we were being tax efficient) we paid ~12.4K in taxes on ~$5K less in income.

[birdman2003]

It's amazing how big of a difference this makes in your taxes.  Last year, we paid ~$5800 in taxes on ~$110K in income (down to ~$63K after after maxing out both our 403bs and tIRAs).  That's like 5%!  And we live in a state & city w/ no income tax.  In 2012 (before we were being tax efficient) we paid ~12.4K in taxes on ~$5K less in income.

Well done!