Retirement contributions feel more painful than they are because people compare the contribution to their take-home pay one-for-one. It doesn’t work that way, and the gap is large enough to change decisions.
A pre-tax contribution costs less than it contributes
A traditional 401(k) contribution comes out of your pay before income tax is calculated. It reduces your taxable income, and you save tax at your marginal rate.
Someone in the 22% bracket contributing $200 per paycheck:
- Contribution to the account: $200
- Federal tax saved: $200 × 22% = $44
- Reduction in take-home: $156
Add state income tax and the gap widens further. In a state with a 5% rate, $200 in the account costs $146 of take-home.
The higher your marginal rate, the better this gets, which is the core argument for traditional over Roth for high earners. A 32%-bracket contributor puts $200 away for $136.
One caveat: 401(k) contributions reduce income tax but not Social Security and Medicare. You pay FICA on the full amount regardless, which is why your stub often shows two different taxable-wage figures.
Get the full match first
Before any other consideration, contribute at least enough to get the full employer match.
A 50% match on the first 6% is an instant 50% return on that money. A 100% match is 100%. No investment available to you competes with that, and declining it means declining part of your salary.
On a $70,000 salary with a 100% match on the first 6%:
- You contribute $4,200
- Your employer adds $4,200
- $8,400 goes into the account for $3,276 of take-home, at a 22% marginal rate
Details that change the value:
- Vesting schedule. A four-year cliff means leaving at three years forfeits everything. Immediate vesting is worth considerably more.
- True-up provision. Without one, hitting the annual contribution limit early in the year stops your contributions, and therefore your match, for the rest of it. If your plan lacks a true-up, spread contributions across all pay periods.
- Eligibility waiting period, which can cost you a year of match.
Traditional or Roth
Both live inside the same 401(k) plan and the same annual limit. The difference is when you pay tax.
With traditional contributions you take the deduction now and pay tax on withdrawal in retirement. With Roth contributions you get no deduction now, and withdrawals in retirement are tax-free.
The decision is a bet on one comparison: your marginal rate now versus your marginal rate in retirement.
- Traditional wins if your rate will be lower in retirement. This is the common case for high earners in their peak years.
- Roth wins if your rate will be higher in retirement. This is often true early in a career, and for anyone who expects substantial retirement income or believes rates will rise.
- Roth also buys certainty. A traditional balance carries an unknown future tax liability, while a Roth balance is yours outright. That is worth something independent of the arithmetic.
Splitting between the two is a legitimate hedge, and many people do exactly that.
In most plans, employer match contributions are traditional regardless of which type you choose, so a pure-Roth contributor still accumulates a pre-tax balance.
Time matters more than tax treatment
The tax treatment is worth a few percent. Time is worth multiples.
At a 7% average annual return, money roughly doubles every ten years. So $10,000 contributed at 25 becomes about $160,000 by 65, four doublings. The same $10,000 contributed at 45 becomes about $40,000, two doublings.
The same money gives four times the outcome. The difference comes from the number of years the money had to compound, whatever the contribution amount or the tax treatment. Early dollars do work that later dollars cannot, which is why the standard advice to start early is more than moralising.
The usual funding order
It isn’t universal, but it fits most situations:
- 401(k) up to the full match. That is an immediate 50-100% return.
- High-interest debt. Credit card debt at 20%+ beats any expected market return, so clear it.
- Emergency fund, three to six months of expenses in cash.
- HSA, if you have a high-deductible plan. It is the only triple tax-advantaged account: deductible going in, growing tax-free, tax-free out for medical costs. After 65 it works like a traditional IRA for anything else.
- IRA, traditional or Roth depending on income and eligibility.
- Back to the 401(k), up to the annual limit.
- Taxable brokerage after that.
What actually goes wrong
Not getting the full match is the most expensive and most common mistake.
Never raising the rate is the next one: setting 3% at 24 and leaving it there. Most plans offer automatic annual escalation, and a 1% increase each year is barely noticeable against a raise and compounds enormously.
Cashing out on a job change triggers income tax plus a 10% early-withdrawal penalty, and destroys the compounding. Roll the balance to the new plan or to an IRA.
Ignoring fees costs more than it looks. A 1% annual expense ratio versus 0.05% can consume a quarter of the final balance over decades. Check what your plan’s funds charge, since low-cost index options are available in most plans.
Loans against the balance stop the money compounding, and if you leave your job the balance typically becomes due immediately or is treated as a taxable distribution.
Summary
Contributing enough to get the whole match is collecting pay you have already earned. A pre-tax dollar costs you less than a dollar. The strongest variable is how many years the money gets to compound, ahead of the amount or the account type.
The 401(k) calculator shows the effect of a contribution rate on both your take-home pay and your projected balance, and the retirement planner projects the whole picture. Projection assumptions are documented on the methodology page.