Take-home pay: How will contributions affect it?
Putting money into employer's retirement savings program may lower individuals current taxable income?
Individuals contributions are deducted from employees pre-tax salary, before federal taxes – and generally state or local taxes – are withheld.1 Since the paycheck is reduced by the amount employees have contributed, the amount of tax taken out also will be reduced.
Remember that individuals contribute and any earnings stay income tax-deferred until employees take a distribution from the plan.2
Calculate It: See how contributions affect take-home pay.
1 Some limitations on contributions may apply.
2 Distributions prior to retirement age (e.g., 59½ for 403(b) and 70½ for 457(b) plans) are generally prohibited. Retirement savings program distributions are subject to plan's restrictions and generally taxed as ordinary income tax in the year of distribution. For 403(b) and 401(k) plans, distributions before age 59½ may be subject to ordinary income tax and an additional 10 percent tax penalty, unless another exception applies. Since the employees retirement plan is designed primarily to help them save for retirement, federal tax rules restrict when money may be withdrawn from the account before retirement. Individuals should consult their tax advisor to determine whether an exception to these tax rules may apply.