How Investing in a 401(k) Affects Take-Home Pay

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Many people are hesitant to begin investing in 401(k) plans through their employer because they're worried about how it will affect their take-home pay. But your pay might not be greatly reduced when you increase the amount you contribute each month. One of the easiest ways to increase the amount you contribute is to add to the amount each time you're given a raise. You might not even notice a difference in your take-home pay in this case.

You should invest at least enough to receive your employer's match, even if you're focused on getting out of debt or saving for a house. This is "free" money that you otherwise would be passing up, and it can greatly affect your future. You may struggle in your retirement years if you don't save adequately now.

Key Takeaways

  • Investing in a 401(k) can be concerning for some people because it reduces their total take-home pay.
  • You should contribute to your retirement plan up to your employer's match, if possible, even if you're saving for a house or trying to pay down debts.
  • How your contributions are withheld from your paycheck depends on the specific type of 401(k) you have.
  • The sacrifices you make now by contributing to retirement will prevent you from having to make more difficult decisions when you're retired.

How Contributions to a 401(k) Affect Your Paycheck

Contributions made to a 401(k) are made on a pretax basis. This means that your taxable income is reduced, so the amount you pay in taxes is less. Your take-home pay won't be affected by the same amount you contribute. It might decrease slightly, but not by much.

Making your first 401k contribution can be the starting point of your retirement savings, then you can use the rest of your excess income toward getting out of debt. Once you've done that, it's recommended that you increase your retirement savings to 15% of your gross income. Retirement savers can additionally set a personal goal to increase lower initial contributions by 1% to 2% annually or use an auto increase/escalation tool if one is available in their 401(k) plan.


Some companies have stopped offering an employer match, but it's still important for you to contribute to your 401(k). A good starting point is 5% if you're not receiving an employer match.

Of course, a saver isn't restricted to a specific incremental increase, and higher bumps up are a good thing. The money you contribute now will grow exponentially over the years, and it's important not to waste the extra time you have to grow your retirement savings.

  • Think about the long-term benefits of investing in your retirement. They'll make life easier in the future.
  • Focus on contributing regularly. The market will go up and down, but you should be in a more comfortable position when it comes to retiring if you continue to invest.
  • A traditional 401(k) is a good option because it can reduce the amount you pay in taxes now, which may make it easier to continue investing when money is tight.

How a Roth 401(k) Affects Take-Home Pay

Your contributions will directly affect your take-home pay if you have the option of a Roth 401(k) because your contributions are made with after-tax dollars. The biggest advantage of the Roth 401(k) is that the earnings aren't taxable. This can end up saving you a lot in taxes once you've reached your retirement years.


You should consider taking advantage of a Roth 401(k) if your company offers one, but it does mean that the amount you contribute will be taken directly from the amount that you would otherwise take home in pay, so you might need to adjust your budget accordingly.

A Roth 401(k) is similar to a Roth IRA in that your contributions won't reduce the amount you pay in taxes each year. But the benefit of not paying taxes on your earnings can pay off when you reach retirement age.

  • A Roth 401(k) allows you to avoid taxes on your investment earnings. 
  • This can be a good option if you are not worried about lowering your taxable income.

If You Don't Qualify for a 401(k)

The sacrifices you make now will prevent you from making difficult decisions once you retire. You may want to consider other investments if you max out your allowable 401(k) contributions.

You should still be saving for retirement if your company doesn't offer a 401(k) plan, or if you have to wait for a year to begin participating. You can do this by setting up a Roth IRA account through a brokerage firm or a bank. The money should be invested in mutual funds, and you can sign up with an institution that will accept monthly contributions without a fee. This will get you started saving for retirement right away.

Talk to a financial advisor who can take you through the steps and help you set up an account if you're at all uncertain about how to start investing for retirement on your own.

More aggressive and riskier investments can help you earn more if you're still young. But you should move to more conservative investments that are safer as you get older. You might not have enough time for the economy to recover if it goes through a slump.

Frequently Asked Questions (FAQs)

How much do 401(k) contributions take out of my paycheck?

Each individual decides how much of their paycheck they want to contribute to their 401(k) plan. You aren't required to put any money into your plan, but you may forfeit matching contributions from your employer if you don't contribute.

How much of my paycheck should go to my 401(k)?

The portion of your paycheck that you should contribute to your 401(k) depends on your age, your company policy, and your general financial situation. The younger you are when you start a 401(k), the less you might need to contribute from each paycheck. It's also a good idea to maximize your employer's contributions, although you should ensure that you have emergency savings set aside before saving too aggressively for retirement.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "401(k) Plan Overview."

  2. Fidelity Investments. "How Much Should I Save for Retirement?"

  3. IRS. "Retirement Plans FAQs on Designated Roth Accounts."

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