Sal and Cal both work for the same company making $55,000 each in annual salary. Sal deposits 5% of her salary to her 401k plan and the company matches 25 cents for each dollar contributed to the 401k up to the 5%. Cal deposits nothing into his 401k.

Question

Sal and Cal both work for the same company making ​$55,000 each in annual salary. Sal deposits 5​% of her salary to her 401k plan and the company matches 25 cents for each dollar contributed to the 401k up to the 5​%. Cal deposits nothing into his 401k.

If they are both in the 20​% income tax​ bracket, how much more in taxes will Cal pay than​ Sal, assuming that all other factors are​ equal?

MathMate · Answer

Since the 401k plan is tax free until the money is withdrawn, Sal has a 5% salary contributed to the plan AND deductible at the marginal rate of 20%.
The company contribution does not matter for the current year taxes until the money is withdrawn.
So the difference in taxes paid is 20% of 5% of the annual salary, or
= $55000*0.05*0.20
= $550

Sal and Cal both work for the same company making ​$55,000 each in annual salary. Sal deposits 5​% of her salary to her 401k plan and the company matches 25 cents for each dollar contributed to the 401k up to the 5​%. Cal deposits nothing into his 401k.

Sal and Cal both work for the same company making $55,000 each in annual salary. Sal deposits 5% of her salary to her 401k plan and the company matches 25 cents for each dollar contributed to the 401k up to the 5%. Cal deposits nothing into his 401k.