Want An Automatic Raise? Contribute To Your 401K!
The easiest way to give yourself a raise without having to ask your boss for one is to start contributing to your 401k at work.
How It Works
Say your annual income before taxes is $30,000. Assuming you didn’t contribute anything to your 401k, you’d be paying $2,684 in income taxes in 2009. But… let’s say that you contribute $5,000 to your 401k. If you did this, you’d end up paying $1,934 in taxes, giving you $750 more dollars which you wouldn’t have had before.
Want An Even Bigger Raise?
What if you contributed $10,000 instead of $5,000 to your 401k? If you did this, now you’d be paying $1,184 in taxes instead of $1,934. Now, you give yourself another $750 bonus on top of the original $750 that you received when you first contributed, for a total of $1,500 more dollars.
Still Not Satisfied?
Well, in 2009 (and now is 2010 as well), you could have contributed up to $16,500 to your 401k. If you were to contribute the entire $16,500 to your 401k, now you’d be paying only $418 in taxes.
So Let’s Compare Some Numbers
If you don’t contribute anything at all to your 401k, you end up paying $2,684 in taxes. However, if you contribute the entire $16,500 that is allowed, you pay $418 in taxes. That’s a difference of $2,266!!!
Okay… so technically speaking, this isn’t a real raise in the sense that your employer isn’t giving you an extra dollar for an hour of your work. Rather, you’re reducing the amount that is included in your income for tax purposes. This leads to a lower tax bill once April 15th rolls around. And since most people get a refund when they do their taxes, they would now end up with a larger refund than if they didn’t contribute to their 401k.
These numbers were calculated assuming a person filed using the single filing status, the standard deduction, and had one exemption.
So what could you do with an extra two thousand dollars a year?