What is 401k?
401k is pre-tax retirement account offered by employer.
Lets see how does pre-tax retirement account work:
Let’s say you are making $50k a year. For the sake of simple calculation, lets assume that $50k is your adjusted gross income. You will fall under 25% tax bracket if filing single. Your total federal income tax for this year would be 8,625. This is 17.25% of your income.
Now assume that you contribute 16,500 to your 401k. In this case your taxable income will be 50,000-16,500 = 33,500. You total federal income tax for this year would be 4,600. This is 13.73% of your income.
So I person making 50,000 deciding to contribute 16,500 to 401k will pay 4,025 or less for this year in federal income tax.
401k Contribution limit:
Contribution limit for 401k for the year 2011 is 16,500 a year.
Contribution limit for the year 2011 is 17,000 a year.
The employer match in 401k does not count toward this limit.