How Pre-Tax Deductions Affect Your Paycheck

Why increasing your 401(k) contribution costs you less take-home pay than the dollar amount you contribute, with a worked before-and-after example.

A pre-tax deduction like a traditional 401(k) contribution comes out of your paycheck before federal and state tax are calculated — which means every dollar you contribute also lowers your tax bill, so your take-home pay drops by less than the full contribution amount.

Worked example

A single filer in New York earning $60,000/year with no deductions has an estimated net annual pay of $46,948.50. The same person contributing $6,000/year (10%) to a 401(k) instead has a net annual pay of $41,998.50.

The difference in take-home pay is $4,950 — not the full $6,000 contributed. The other $1,050 came from tax savings: $720 less federal tax and $330 less estimated state tax, since taxable income for both dropped by the same $6,000.

Why this matters for retirement planning

Because the effective cost of contributing is lower than the contribution itself, increasing a 401(k) contribution rate "costs" less take-home pay than it might seem at first glance — in this example, contributing 10% of salary only reduced take-home pay by about 8.25% of salary, while still building $6,000/year of retirement savings (before any employer match or investment growth).

Adjust the pre-tax deductions field in the Paycheck Calculator to see exactly how a different contribution amount would affect your own take-home pay.