How 401(k) Contributions Affect Your Paycheck

The "Free Money" Mechanism

Contributing to a Traditional 401(k) feels painful. You are locking money away for decades. But the tax code makes it easier by effectively subsidizing your savings.

Pre-Tax Magic

Traditional 401(k) contributions are deducted from your Gross Pay before federal and state income taxes are calculated.

The Example

Marginal Tax Bracket: 22% (Federal) + 5% (State) = 27% Total.
Contribution: You decide to save $100.

Without 401(k): You earn $100. Taxes take $27. You keep $73.

With 401(k): You put $100 into the account. It is not taxed yet. The full $100 goes to work for you.

The Result: Your paycheck only drops by $73, but your savings grow by $100. The government effectively "paid" the other $27.

Traditional vs. Roth 401(k)

Traditional: Tax break now. Pay taxes when you withdraw in retirement. Good if you think your tax rate is higher now than it will be later.
Roth: Pay taxes now. No tax break today. Withdrawals are tax-free in retirement. Good if you are young and expect your income (and tax rate) to rise.

The Employer Match

This is the real game-changer. Many employers match your contributions (e.g., 50% match up to 6% of salary).

You put in $100.
Employer puts in $50.
Total: $150.
Cost to you: $73 (in lost take-home pay).

You turned $73 of spendable cash into $150 of wealth instantly. That is a 100%+ immediate return.

Summary

Never leave the employer match on the table. It is part of your compensation.

Use our Take-Home Pay Calculator to see exactly how different contribution percentages affect your net pay.