Get a tax advantage

When you make pre-tax contributions, you’ll get an immediate tax break. That’s because your savings are deducted from your paycheck before taxes are taken out, so your taxable income is reduced.

Let’s say you earn $30,000 a year and contribute 10% to the plan, pre-tax. You won’t have to pay taxes on your $3,000 plan contribution. So if you’re in the 15% tax bracket, you’ll pay $450 less in taxes.

Annual Salary	10% Plan Contribution	Tax Bracket	Tax Savings
$30,000	$3,000	15%	$3,000 x 15%
Tax savings: $450

Another way to look at it? You’re saving $3,000 but paying only $2,550 out of pocket.

Withdrawals from pre-tax investments may be taxed at your ordinary income tax rate. Withdrawals before age 59½ may be subject to income taxes and a 10% federal penalty tax. This hypothetical illustration does not represent the return on any particular investment.