Here’s a basic example:

Jan and Dave each earn $50,000, and we’ll assume they are taxed at a flat rate of 25%.

Jan contributes 10 percent (or $5,000) to his employer’s tax-deferred plan each year. He is now taxed on $45,000 of income, instead of $50,000. This year he’ll pay $11,250 in taxes, $1,250 less than he paid last year. AND, he has $5,000 in his retirement account.

Dave decides he doesn’t need to save for retirement and give the employer’s plan a pass. Dave pays $12,500 in taxes on the full $50,000

$1 dollar taken as income = $.75 goes to you $.25 goes to the IRS, so you only have $.75 to set aside for retirement on your own.

$1 dollar contributed to plan = $1.00 to your plan, $0 to the IRS.

This material was created to provide accurate and reliable information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.