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Convenient to Save
It's easy to save in your company retirement plan because you contribute through regular payroll deductions. Once you decide how much to contribute, the money is automatically deducted from your paycheck and invested in your company plan retirement account. |
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Benefit From a Double Tax-Break
Reduce Your Current Taxable Income.
Usually, you're taxed on all of your pay. But, thanks to special government regulations, the money you put into your company retirement account comes out of your paycheck before it is taxed. So the amount you pay taxes on is reduced. In other words, it actually costs you less than a dollar now to put away a dollar for the future. Let's see the effect of this tax incentive on Betty's take-home pay.
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| Betty contributes 10% of her annual salary, or
$3500, to her company retirement plan account vs. an ordinary taxed savings account. Her take home pay is greater by almost $1000 when she invests her savings directly into the company retirement account rather than an after-tax savings account. |
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Ordinary Taxed Account |
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Company Retirement Account |
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| Annual Income |
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$35,000 |
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$35,000 |
| Your Plan Contribution |
N/A |
3,500 |
| Taxable Pay |
35,000 |
31,500 |
| Federal Income Tax |
6,505 |
5,525 |
| Social Security/Medicare |
2,678 |
2,678 |
| After-Tax Savings |
3,500 |
N/A |
| Take-Home Pay |
22,317 |
23,297 |
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| The amount of income tax you save depends on your tax bracket and how much you put into your plan account. In this hypothetical example, the federal tax shown reflects the standard withholding for a single filer making $35,000 in a tax bracket of 28% a year in 1999. Exemptions, itemized deductions, and state taxes are not reflected. |
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| Multiply Your Savings With No Current Taxes on Your Earnings
In addition to tax breaks now, you'll pay no current taxes on the money your savings earn over the years. And because earnings are continuously reinvested - deposited back into your plan account - your retirement savings can build surprisingly fast. That's the power of tax-deferred compounding. |
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| Below is an example of how the power of tax-deferred savings can multiply your retirement savings: |
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| Value of $70 Weekly Contribution in 40 Years |
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| In Your Company Retirement Account |
$977,482 |
| In An Ordinary Taxed Savings Account |
$530,825 |
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| Withdrawals you make at retirement will be considered income and subject to ordinary income taxes. If you make withdrawals before 59 1/2 significant tax penalties may apply. This hypothetical example assumes 8% annual return compounded monthly before inflation with all capital gains and dividends reinvested. Assumes 28% tax rate on savings. |
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Take Advantage of Free Contributions
In addition to contributions you make to your company retirement account, your company may choose to match those contributions you have made. Company match contributions are a valuable benefit that can significantly increase your retirement savings.
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| For example, Betty's company contributes $.50 for each $1.00 she contributes, up to 10% of her salary or $3,500. If Betty contributes $3,500 to her account, her company kicks in an additional $1,750. |
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| That means the total contribution to Betty's company retirement plan account for the year is $5,250. |
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