Putting $250 a paycheck into a 401(k) does not cost you $250 of take-home. It costs less, sometimes a lot less, and the gap is the whole reason people are told to contribute before they feel they can afford to. The size of the gap comes down to one number.
Why the cost is smaller than the contribution
A traditional 401(k) deferral comes out of your pay before federal income tax is figured, and before state income tax in almost every state that has one. The money you would have handed over in tax on that slice of pay simply stays with you.
So the arithmetic is your contribution multiplied by one minus your marginal income tax rate, meaning the rate on your last dollar rather than the average across your whole salary. Contribute $250 at a 22% federal marginal rate in a state with no income tax, and take-home falls by about $195.
What it does not do is save you the 7.65% for Social Security and Medicare. Elective deferrals are exempt from income tax withholding and from nothing else, which is why they appear in boxes 3 and 5 of your W-2 but not in box 1. OASDI on your pay stub goes into that.
What a 6% contribution actually costs
| Salary and state | Into the 401(k) | Take-home falls by | Cost per dollar saved |
|---|---|---|---|
| $45,000, Texas | $104 | $92 | 89 cents |
| $65,000, Texas | $150 | $132 | 88 cents |
| $110,000, Texas | $254 | $198 | 78 cents |
| $65,000, California | $150 | $121 | 81 cents |
| $110,000, California | $254 | $172 | 68 cents |
Read the bottom row twice. Someone on $110,000 in California moves $254 into their own retirement account and feels $172 of it. That is 68 cents on the dollar, and it is not a trick or a promotion. It is what a marginal rate of roughly a third looks like from the other side.
The pattern is worth naming: the higher your income and the higher your state’s income tax, the cheaper a contribution gets. This is one of the few situations where living in a state with no income tax is the worse deal, because there is no state tax to save.
To see your own figures, put your gross and your state into the take-home pay calculator and move the retirement field. Watch the net line, not the tax lines.
If your employer matches and you are not contributing enough to get all of it, none of the above matters. A common match is 50 cents on the dollar up to 6% of pay. On $65,000 that is around $1,950 a year of someone else’s money, and turning down a 50% return to save 88 cents on the dollar is not a close call in either direction. Work out the match threshold first, contribute at least to it, and only then start thinking about tax rates. The arithmetic in this article is for deciding what to do above the match, not below it.
It does not shrink your Social Security benefit
This one catches people out in a good way. Because a 401(k) deferral never comes out of your Social Security wages, the earnings record your future benefit is calculated from is untouched by it.
Deferring 15% of your salary for thirty years does not reduce the Social Security check at the end of it by a cent. You paid the 6.2% on all of it along the way, so you are credited with all of it. The FICA line you cannot avoid is buying something.
A Roth deferral changes the arithmetic completely
If your plan offers a Roth 401(k) and you choose it, everything above stops applying to the paycheck side. A Roth contribution is made after income tax, so $250 into a Roth costs the full $250 of take-home. There is no immediate saving because you are deliberately not taking one.
The FICA treatment is identical either way, so the 7.65% is not part of the decision. What you are choosing is whether to pay income tax on the money now or in retirement, which turns on whether you expect your rate then to be higher or lower than your rate today. Someone early in their career at a 12% marginal rate is making a very different bet from someone at 32%.
The 2026 limits
- $24,500 is the most you can defer from your own pay, up from $23,500 in 2025.
- $8,000 more if you are 50 or over, taking the total to $32,500.
- $11,250 instead of the $8,000 if you are aged 60 to 63, which is a separate and larger catch-up window.
- Your employer’s match does not count against your own limit. The $24,500 is yours alone.
One practical trap at the top end: hitting $24,500 in October means your contributions stop for the rest of the year, and so does any match that only lands when you contribute. Your total for the year turns up as code D in Box 12 of your W-2, which is worth checking against your final pay stub. If your plan does not true up at year end, front-loading can quietly cost you two months of match. Worth checking before you raise your percentage.
Frequently asked
By less than you contribute, because a traditional deferral comes out before income tax. On $65,000 in Texas, a 6 percent contribution of $150 a paycheck lowers take-home by $132. On $110,000 in California the same 6 percent, $254, lowers take-home by $172. The higher your rate and your state tax, the cheaper it gets.
No. Elective deferrals are exempt from federal income tax withholding only. They stay in your Social Security and Medicare wages, which is why they appear in boxes 3 and 5 of your W-2 but not box 1. The 7.65 percent comes off the full amount either way.
No, and this is the upside of the answer above. Your benefit is calculated from your Social Security earnings record, and a 401(k) deferral never leaves it. You pay the 6.2 percent on the money, so you are credited with it.
More expensive, by design. A Roth deferral is made after income tax, so $250 into a Roth costs the full $250 of take-home while $250 into a traditional account costs less. You are choosing to pay the tax now instead of in retirement.
$24,500 of your own pay, up from $23,500 in 2025. Add $8,000 if you are 50 or over, or $11,250 instead if you are aged 60 to 63. Your employer's match does not count toward your limit.
Get the full match first, because a 50 percent match is an immediate 50 percent return and no tax saving competes with that. Above the match, the question becomes whether you would rather pay income tax on the money now or later, which is where your marginal rate comes in.