How Your 401(k) Affects Your Take-Home Pay

A traditional 401(k) is one of the few ways to pay yourself and cut your tax bill at the same time. The key is that contributions come out of your pay before income tax is calculated — so a dollar saved costs you less than a dollar of take-home pay.

The core mechanic: pre-tax contributions

When you contribute to a traditional 401(k), that money is deducted from your taxable income. If you earn $80,000 and contribute 10% ($8,000), the IRS only taxes you on $72,000. You still own the full $8,000 — it’s just sitting in your retirement account instead of your checking account.

What it doesn’t reduce: FICA

One important catch: 401(k) contributions lower your income tax (federal and state), but not FICA. Social Security (6.2%) and Medicare (1.45%) are still charged on your full salary, including the part you contribute. So a 401(k) reduces income tax, not payroll tax.

Contribution limits (2025)

• Employee limit: $23,500 per year.
• Catch-up (age 50+): an extra $7,500.
• Employer matches don’t count toward your employee limit — that’s free money on top.

Traditional vs Roth, briefly

A traditional 401(k) gives you the tax break now and you pay tax on withdrawals in retirement. A Roth 401(k) is the reverse: no break today, but tax-free withdrawals later. Traditional lowers your take-home pay less today; Roth costs more now but can be better if you expect to be in a higher bracket in retirement. Both reduce your paycheck — only traditional reduces your tax today.

The size of the break depends on your marginal tax rate — the higher your bracket, the more each pre-tax dollar saves you.

Model it yourself

Our US calculator has a 401(k) slider — drag it and watch your take-home pay and tax change in real time, so you can find the contribution level that fits your budget.