401k Contribution Amount Put Me In Different Tax Bracket?
Have you ever wondered what a 401k does to your taxable income?
ANSWER: It will bring your taxable income down by the amount which you put into the 401-K. You will not have an increase in take-home pay because you’ll be putting more into your 401-K.
Here’s an example. If you’re in a 25% tax bracket, meaning that 25% of the money you make goes to taxes, and you put $1,000 into your 401-K, you are not taxed on that amount. So, you reduced your take-home pay by $1,000, but you also reduced your tax bill by $250.
It’s not a one-for-one deal meaning that you don’t get a $1,000 tax break because you put $1,000 more in your 401-K. Your tax rate determines that.