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Ask Dave

401k Contribution Amount Put Me In Different Tax Bracket?

Have you ever wondered what a 401k does to your taxable income?

QUESTION: Kevin asks if he’ll end up with more take-home pay by putting more money into his 401-K.  He was told he’ll have a lower taxable income if he does that.  Is that correct?

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.
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Taxes Made Easy! 

Taxes Made Easy

Take the stress out of tax prep with our free checklist.

Taxes Made Easy! 

Take the stress out of tax prep with our free checklist.