One of the advantages of a 401k that makes it such a great deal is that it saves you federal income taxes in the year you contribute to it. The details from Kiplinger's:
Every dollar you put in your 401(k) reduces your 2007 taxable income by $1 and your federal tax liability by $1 multiplied by your tax bracket.
Let's say you put $5,000 a year (not a huge number, but not an easy one either for most people) in a 401k and you're in the 28% tax bracket. Let's say you do this for 40 years during your career. And then let's say you take this money and invest it at 10% each year. How much do you have at the end of the 40 years? Almost $620,000!
And to boot, this is probably the LEAST financially attractive reason to have a 401k of the "big three" reasons (the other two are company match and tax deferred growth.) However, this one benefit alone makes a 401k a GREAT investment and something everyone should take as much advantage of as possible to help grow their net worth.
Wrong analysis. You have to apply income taxes to the $620,000 because you haven't paid them yet and you have to in order to spend it.
Not knocking the program, but the numbers should be right.
Posted by: Kurt | March 20, 2007 at 12:58 PM