In general, I agree that company matching is a great benefit. Even if you’re putting in 15% and they’re puting in 5% of your salary, you’re making free money!

With respect to the taxes, I’m assuming they’ll eventually make all income taxable, so if you’re shooting to replace some portion of your current earnings as often suggested (e.g. 75-100%), chances are your tax bracket won’t change much unless your current income skyrockets as well. In which case, we should all be so lucky :-).

Will Jimmy be in the 28% tax bracket when he starts drawing money out or will he be in a higher tax bracket, say 33% or higher?

Even though Trent has overstated the benefit, it is still to Jimmy’s advantage to participate in the 401(k) up to the point of getting all of the employer match. Anything over that should go to his Roth IRA.

What I meant is that his 401(k) contributions are taken out prior to taxes. If he was contributing the money to a retirement plan after he’d already had taxes taken out, then it wouldn’t come out the same tax benefit.

And while I don’t have the exact dollar figures on hand for myself and my husband, by us contributing about 10% of our pre-tax income to our simple IRAs, we end up getting a massive refund. So, we end up contributing around $14,000 a year (pre-tax, which wouldn’t be that much after-tax), which puts us into a lower tax bracket at end-of-year taxes, which saves us about $5000 on our taxes, or thereabouts.

So we save money by saving money pre-tax. If we tried to save that same $14,000 a year after taxes, it would end up being a significantly larger percentage of our pay. (And no, that doesn’t even take into account our employer match.)

We make about $140,000 per year. Assuming a 28% tax rate, if we take 10% pre-tax ($14,000) and save it, our take-home pay is $90,720.

If we decided to take that $14,000 out after-tax, we would have $100,800 after that 28%, then deducting $14,000 would leave us with $86,800, a difference of $3,920.

So, not even factoring in the end-of-year tax reduction, we already saved $3920 by contributing pre-tax money to our IRAs. If you then take into consideration our employer’s match (3%, which he doesn’t match after-tax), we would then have saved $8,120, in addition to the $14,000.

And I really do get the fact that “take-home pay” *IS* after-tax.

My employer matches .25 on the dollar up to 6%, so the very first day I was eligible for the 401(k) I joined at 6%. The next year I bumped it up to 10% at the same time as our annual raise hit, so I saw virtually no impact on my paycheck, but I’m saving a whole lot more for retirement.

But it seems that the calculator doesn’t take inflation into account. $822,664 will be worth less than half that, right?

Also, Jim must have some significant unearned income if he’s in the 28% tax bracket while earning 55k. He can make up to $74,200 in the lower bracket, even filing single. :)

From Wachovia, regarding the immediate impact on take-home-pay:

“Assumes FICA (Social Security and Medicare) withholding of 7.65% on the first $94,200 of taxable earnings and Medicare withholding of 1.45% on any income over $94,200.”

I thought it was a FICA tax rate of 6.2% and a Medicare tax rate of 1.45% for a TOTAL of 7.65% ???

Also, I can’t get the calculator to work correctly at all! The closest I can get it to match my real actual current paycheck deduction is still $63 short.

If Jimmy’s take home pay is reduced by $384 during the year due to his 401(k) contributions, but he then receives an additional $171 in tax benefits, then it does work out to only costing him $213.

It’s different when it’s after-tax money, and then you’re right, you can’t subtract that $171. I have a simple IRA through my job, and the 10% pre-tax that I contribute does mean additional savings on my tax bill. Between my husband and myself, that adds up to substantial savings, for us saving!

And I think that the 28% is adding a 25% federal and a 3% state tax rate.

Just my $.02

… which, if invested for 30 years at an 8% rate compounded monthly really equals $.22.

Ordinary 401(k)s and ordinary IRAs have some distinct disadvantages when it comes to whatever effort you might make to give your kids a fighting chance at staying in the middle class.

Also, who knows what tax rates are going to be like 30-40 years from now? There might be a huge tax increase across the board. That, to me, is a good enough reason to have accounts of both types.