Even though maxing my retirement contributions was a scary step, I keep reminding myself about the tax savings. The $1625 a month contribution actually feels more like $1268 because I’m not throwing nearly $400 a month away never to be seen again.
It’s true I’ll have to pay taxes on it later, but the goal is to keep my tax bracket low so that I still get to keep 90%ish of that $357. Let’s take a deeper look into how I got these numbers.
The proof is in the numbers. I’m showing you my REAL monthly taxes from before maxing, where I was contributing 5% pretax and 2% to my company’s Roth. Before maxing my pretax contributions, my taxes were $1226.32 per month. That means I was paying $14,715.84 in taxes! I don’t know about you all, but my refund is nowhere near that number.
Now I’m contributing the max to pretax and keeping more money on my side of the ledger. I pay $869.10 a month in taxes. That’s $10,429.20 a year; which is a $4,286.86 savings straight in to my retirement account!
Let’s talk a little bit about how this works. My income lands in the 22% marginal tax bracket. By maxing my contributions, I’m lowering the total amount of money being taxed at 22% from around $15,440 to $1,316. Tax brackets are super confusing, so I used this handy tool from efile.com and calculated my effective tax bracket, which is what you actually pay in taxes each year. Even though I didn’t get all of my money under the 22% bracket, I did lower my effective tax rate by approximately 2.62%. That may not seem like an impressive number but when you are saving $4000 a year, that little percentage adds up!
So tell me, how many of you are maxing your 401k and how are you feeling about it? It’s definitely terrifying at first, but I’m so thankful I took this step toward financial freedom.