Money put into your traditional 401k is pre-tax.
$1 added to your 401k reduces your taxable income by $1.
So you’ll pay 25 cents less in taxes.
Our Financial Zen Members’ average effective tax rate is ~25%.
For every $1 they make, they pay 25 cents in taxes and get to keep the remaining 75 cents.
And that means If you put $1 in your 401k, you’ll only reduce your spending by 75 cents, not $1.
EXTRA CREDIT:
You’ll pay the taxes on your 401k savings only when you withdraw the money.
So the bet is that when you’re withdrawing your money, you’ll be in a lower tax bracket.
Our Members who have achieved Financial Zen, on average pay an effective tax rate of 15%.
That will save them 10 cents in taxes for every dollar saved.
Or from another angle, that’s a 10% rate of return on all the money you save in your 401k.
And that is why you should be maxing out your 401k every year.
You’ll pay less in taxes now AND when you achieve Financial Zen.
