This is a continuation from: Tax Savings, Where’s That?
Well we couldn’t find the tax savings in the first post. However, you remember those enrollment books we mentioned in the last post. They mention having more money in your paycheck. So the tax savings must be there, right? Let’s look at it…
We have our $4,000 paycheck here. We’re going to have our $400 Traditional 401k contribution come out pre-tax. Then we only have to pay taxes on $3,600. Great. In a 25% tax bracket that means we only pay $900 in taxes. That leaves us with a spendable income of $2,700 (4000-400-900). With the Roth 401k the taxes come out first. So we get our $4,000 paycheck and first take out $1,000 for taxes. Then our $300 Roth 401k contribution, that’s $400 minus 25% taxes. This leaves us with a spendable income of $2,700 (4000-1000-300). Wait, that’s the same amount. That isn’t right is it?
We paid less taxes, $900 vs $1,000. Plus we have $400 in our 401k instead of $300. Yeah, we have the same spendable income but this must be the advantages we are looking for. So the advantage is in the Traditional 401k?
To Be Continued…
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