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:

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