Income - Head Matters

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3. Employer Savings Plan
 

Let’s examine what affect a retirement plan would have on Tina’s current income.

Tina’s new employer has offered her the option of investing in an employer-sponsored, tax-deferred retirement savings plan.  The tax code allows her to invest a portion of her monthly earnings in a retirement savings plan based on gross income.  This means:

  • Her tax contributions are deducted from her paycheck BEFORE taxes (pre-tax contributions) thus reducing her taxable income and her taxes withheld.
  • Her contributions are larger.  For every dollar she invests before taxes, she would be able to invest only 75-85 cents if she paid taxes on that dollar first (based on being in the 15-25 percent tax bracket).


She has made the following comparison to determine the effect on her monthly take-home pay if she invests in the retirement savings account with a 33 percent employer match and compared this with her take-home pay if she invests in a regular after-tax savings account.  In both cases, Tina will set aside $250 each month for her savings.  She is filing as a single person with a total annual income of $30,000 with no other income and with standard deductions.  To determine the impact on her savings and take-home pay, she created this table.

Tina's take-home pay and savings:

After-Tax Savings Account   Tax-Deferred Savings (with Retirement Savings Account and Employer Match) 
   Annual  Monthly   Annual  Monthly
Income  $30,000 $2,500  Income $30,000 $2,500 
Taxes $3,385 $282  Taxes on $27.000 $2,935 $245 
Net Income $26,615  $2,218  Net Income  $27.065 $2,255 
After-Tax Savings  $3,000  $250 Pre-Tax Savings $3,000  $250
Employer Match  $0  $0 Employer Match $1,000  $83
Total Savings
without Interest
$3,000 $250 Total Savings
without Interest
$4,000 $333
Disposable Income         (Net savings) $23,615 $1,968 Disposable Income
(Net savings)
$24,065 $2,005

  

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