Wednesday, October 1, 2008

Calculating Your Tax Savings

*** Update: 10/3/08: It's been brought to my attention by a financial planner/Save 4 Fun reader that the Additional Annual "Catch-Up" Contribution for Employees Age 50 & Over function on this calculator is not up to date. For 2008, the maximum is $5000. However this calculator will only allow a maximum of $3000 for the "catch up" contribution.

I finally found a simple calculator that tells how much I will save in taxes now based on how much I put into my 403(b). (In case you didn't know, a 403(b) is the same thing as a 401(k), but the former is for non-profit organizations while the latter is for for-profit companies.)

So, if you are looking to put money into your employer's pre-tax retirement saving plan, check out this calculator. You will realize that you won't be parting with as much as your money right now as it seems.

Using the figures that the calculator has as its default settings, if you earn $50,000 annually, pay 5% in state taxes, are married and file jointly, and put 6% ($125/month) into your 401(k), you are really saving $25/month in taxes! That's $300 savings for the year!

In this example, increase your contribution to 10% of your gross paycheck, and you'll save $1000, annually. Better yet, put in 15%, and you'll save $1500 for the year! (And in the case of 15%, you'll have socked away $7500 for the year for retirement.)

You can use this calculator to figure savings if you use other pre-tax benefits too. For example, my husband just signed up with his employer to have his Metro fare taken from his paycheck pre-tax. He'll be saving $25.50 each month in taxes by using the pre-tax payroll deduction over going to the machine to buy fare for the bus and subway. That's $306 for the year! Trust me, we can think of far more "fun" things to do with that $306, than paying it to Uncle Sam for Michael to get to work.

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