How 401k saves you money

I received a performance bonus of $1000 from my job this week.  Because of the simplicity of the numbers, it allowed me to see how my 401k actually increases the amount of cash I keep instead of losing it to Uncle Sam.

I contribute 15% of my income to my 401k, which means I get to subtract out $150 from the $1000 bonus BEFORE taxes.  My income is then taxed at 40% and the remaining amount is what I take home.

YES 401k

$1000 x 15% = $150 -> 401k 

$1000 - $150 = $850 (decreased income subject to tax)

$850 x 40% = $340 -> Uncle Sam

$850 - $340 = $510 -> my pocket

Total Cash I keep -> $510 + $150 = $660

Now if I had elected not to contribute to my 401k, the entire $1000 is now subject to the 40% income tax and I would be losing 6% more to Uncle Sam.

NO 401k

$1000 x 40% = $400 -> Uncle Sam

Total Cash I keep -> $1000 - $400 = $600

($660 - $600)/$1000 = 6%

I dedicate this posting to my co-workers and friends, who beleive they are taking home more spending cash by not contributing to their 401k but are actually losing money to Uncle Sam.  Help me help you! Don't give your money to Uncle Sam, give it to your 401k.

"A penny saved is a penny earned." -- Benjamin Franklin

"Help me help you." -- Jerry Maguire

**NOTE**

When you finally do cash out your 401k, you will be taxed at a much lower rate than 40%.  The rate you will be taxed at is the same rate you are taxed for holding a stock for 1 year, which is generally about 20%.  A savings of approximately half on income tax; all the while your 401k cash is growing in a compounding interest account for the next 20+ years.