Do you really know what you make? If you are an employee, let’s take a quick look at your paycheck and the taxes that apply to your income.
- Social Security Tax = 6.2% (For 2015, the maximum amount of taxable earnings is $118,500. This keeps going up.)
- Medicare Taxes = 1.45%
- Federal Income Tax = 20% (depends on your income tax bracket, I used 20% as an example)
- State Income Tax – 5% (depends on your income bracket, I used 5% as an example)
That is 32.65% in taxes. For every $100 you earn, you effectively pay $33 in taxes. When you save this $100 to a 401k, IRA, or tax deferred retirement account, you get to save it tax free. None of these taxes are applied at the time $100 was earned. Taxes are deferred and applied only at the time of withdrawal.
For 2015, the maximum employee contribution that can be made into 401k account is $18,000. This has nothing to do with how much your employer contributes. What you can contribute as an employee irrespective of what the employer contributes is $18,000 for this year.
Many employers match your 401k contributions up to a certain percentage. This is free money in your pocket.
- At the very least, you should contribute enough to get the full contribution match from your employer. This a good starting point.
- If your employer does not contribute, you should still contribute. Below is a strategy you could follow.
- Start at 3% contribution and increase your personal contribution by 1% every year – until you are able to max out your allowed contribution into your 401k account. You will feel a little pinch initially but will soon get adjusted to it. After that, at 1% increase in contribution per year, you won’t feel the pinch that much.
The younger you are, the more advantageous it is for you. No matter what your age is, it s never too late to save for retirement. You can make your money work for you – check out the time value of money. Uncle Sam taxes you for taking your money now and encourages you to save for retirement by deferring your taxes. You need to remind yourself often that nobody is going save for your retirement but you.