How a 401(k) Contribution Affects Your Paycheck

Many people avoid contributing to their 401(k) because they're worried it will significantly shrink their paycheck. The reality is more nuanced — and more encouraging. Because pre-tax 401(k) contributions reduce your taxable income, you get a built-in tax break that offsets part of the contribution.

How Pre-Tax 401(k) Contributions Work

When you make a traditional (pre-tax) 401(k) contribution, the money comes out of your paycheck before federal and state income taxes are calculated. This means:

• Your taxable income goes down
• You pay less in federal and state income tax right now
• Your net take-home pay decreases by less than the contribution amount

Example: $75,000 Salary, 6% Contribution

Contributing 6% of a $75,000 salary means $4,500/year, or about $173 per biweekly paycheck.

You're contributing $173 to your retirement — but your take-home only drops by about $135. The tax savings cover the other $38.

The 2025 Contribution Limits

• Employee limit: $23,500
• Catch-up contribution (age 50+): additional $7,500
• Total including employer match: up to $70,000

Pre-Tax vs. Roth 401(k)

A Roth 401(k) uses after-tax dollars — so it doesn't reduce your taxable income now. Your paycheck drops by the full contribution amount. The trade-off: qualified withdrawals in retirement are completely tax-free.

Generally, if you expect to be in a higher tax bracket in retirement than you are now, Roth makes sense. If you expect to be in a lower bracket in retirement, pre-tax is usually better.

Does an Employer Match Affect Your Paycheck?

No — your employer's matching contribution is paid separately and doesn't come out of your paycheck. It's essentially free money added to your account. Always contribute at least enough to capture the full match.