A question by Shawn : Let’s say you contribute $200 per month but your company gives you absolutely NOTHING? do you still pay tax on that $200? if you do, why would anyone contribute to their 401(k) only to give the government free money? ?
Provide a response using the comment section. After review we will update the answers.
“Tax is owed on 401k withdrawals only. Any money put into the 401k has a tax deferred status..You pay social security and medicare tax on that money, but not income tax until you withdraw it unless you contribute to a Roth 401k. Roth contributions are not tax deductible, but you don’t pay tax on the money when you withdraw it. You can have it either way. If yours is a Roth, you pay the taxes up front. If it’s a regular 401k, then you pay when you cash in. Might as well not worry about it, you will be paying taxes. Don’t let that put you off from having a retirement savings. Mine saved my life. Just do it.”Bill
you should try to understand what a 401k is and how it works. Why do you put money into a savings vehicle if you do not understand how it works?
if your company is NOT giving you a floor or a match when you contribute then I would suggest you not contribute. There are better savings vehicles than a 401k when you are not getting a company match from the 401k.
But I am guessing you don’t know what a ROTH device is either so you need to do some learning before investing or saving.
if you are currently in the lower income brackets, the you should use the Roth 401k instead of the regular 401k since it is likely your income will be higher in your retirement than it is now and so the tax benefit you are supposed to get from a 401k is actually hurting you not helping you. Once you get into the higher tax brackets you can switch and contribute to the regular 401k.
“You don’t give the government money when you contribute. You contribute so you will be taxed less. When you contribute to a 401K, you pay less income tax.”StephenWeinstein
“The tax is deferred and is paid when you withdraw it at a time in your life when you’re in a lower tax bracket so your liability is less. In the meantime, you earn lots of interest and lower your taxable income each year by the amount you contribute because it is taken out before taxes..”John Alden
If it’s a traditional 401k plan then you don’t pay income tax on the money you contribute. So, $200/ month means $2400 per year. At the end of the year the taxable wages on your W2 form will be $2400 less than what you actually earned. The amount you actually save on your tax liability will vary based on your tax situation, it could be nothing, or it could be over 40% of your contribution amount after considering both federal and state taxes.
The benefit is that you defer taxes and the money you would have spent on taxes this year is in your account compounding as your investments grow. When you retire and begin withdrawing money from the account you will owe tax on each withdraw as income.
If its a Roth 401k plan and you choose the option to call your contributions “Roth” then you don’t get any tax deduction right now, you’ll pay income tax on your full salary. But all the growth between now and retirement is tax-free. You’ll be able to take money out of the Roth account in retirement without owing any tax at all.
Neither option is “just giving the government money” – the money goes into a private account owned by you – just like a regular bank account – except you get more favorable tax treatment.
If your employer does not offer a matching contribution, you might also consider opening an IRA. This gives you the same 2 options for traditional or roth but you can choose your broker and choose your investment types without being restricted by your employer’s plan.