Why a 401(k) Costs Less Than You Think
Traditional 401(k) contributions come out of your paycheck before income tax. The money you save is never taxed this year, so your federal (and in most states, state) tax bill shrinks along with it. That's why putting $500 into your 401(k) typically lowers your take-home pay by only $350 to $400: the difference is tax you would otherwise have paid.
Social Security and Medicare still apply. Unlike health insurance premiums, 401(k) deferrals are still subject to FICA, so the savings come entirely from income tax. The higher your tax bracket, the cheaper each dollar of saving becomes.
2026 limits. You can defer up to $24,500 of salary. Savers aged 50 and over can add an $8,000 catch-up, and those aged 60 to 63 get a larger $11,250 catch-up. From 2026, if you earned over $150,000 from your employer last year, catch-up contributions must be made as Roth (after-tax) contributions. Employer matches don't count toward your limit.
Tax deferral isn't tax freedom: withdrawals in retirement are taxed as income. A Roth 401(k) flips the trade, with no tax break today but tax-free withdrawals later.
Estimates for tax year 2026 using federal brackets, the standard deduction and the $184,500 Social Security wage base. California and New York use simplified single-filer brackets; other states use the flat rate you enter. Not tax or investment advice.