A Surprisingly Painless Way to Save More for Retirement

You probably don’t want to give up another $25 or $50 of each paycheck to boost your 401(k) contribution by that amount, even if you think you should.

But here’s the good news: You don’t necessarily have to.

We aren’t saying that additional savings won’t hurt at all. But because you are contributing pre-tax dollars, the hit to your paycheck may be less than you expect.

Say you’re in the 25% tax bracket, which applies to single filers with taxable income between $37,651 and $91,150 this year. Each extra $10 you contribute to your 401(k) will ding you only $7.50 after U.S. tax.

Think of it this way: Today, that $10 in pay costs you $2.50 in income tax. When the money goes instead to your 401(k), there’s no immediate tax due. (You’ll pay tax on withdrawals in retirement instead.) So the full $10 goes into your kitty for later in life and you get a $2.50 tax savings, for a net hit of $7.50.

Your after-tax cost will be even smaller if you are in a higher tax bracket. If that $10 would have been taxed at 28%, channeling that money to your 401(k) will trim your take-home by about $7.20. If you’re in the 35% tax bracket, it’s only about a $6.50 cost to your paycheck.

If your pay is also subject to state or local tax, the out-of-pocket cost of putting extra dollars into your 401(k) will be even lower.

Saving an additional 1% of pay “is a lot easier than most people would think,” partly because of the tax factor, says Katie Taylor, a director at Fidelity Investments. Even saving an additional 2% of pay might not be so tough—and that’s encouraging given that “most people aren’t saving at the rate they should be,” she says.

You'll get the biggest bang from upping your 401(k) contribution if you previously weren't taking advantage of the full matching contribution available from your employer. With a dollar-for-dollar match, for instance, an extra $10 contribution might cost you $7.50 or less but boost your 401(k) balance by $20.

Read: 3 Questions That Can Help You Get the Most From Your 401(k)

Here are a few more things you should know about how increasing your 401(k) contribution could affect your taxes and your paycheck:

Exact numbers may vary. The impact of a bigger 401(k) contribution on your take-home pay may be slightly different from the after-tax cost you calculate because of the details of your tax withholding. Your company’s HR or payroll department should be able to tell you exactly how your check would be affected, says Mike Piper, a CPA and author who blogs at Oblivious Investor.

Online tools. There are numerous online calculators, of varying degrees of complexity, that you can use to estimate how a change in your 401(k) contribution would affect your paycheck. Here’s Fidelity’s take-home pay calculator.

Not these taxes. Social Security and Medicare taxes are levied on earnings that you direct to your 401(k) the same as if you took those dollars as take-home pay, so there's no tax savings there.

Read: 10 Key Numbers to Know About 401(k)s

Surprisingly big tax benefits…. In some cases, the income-tax impact of an additional 401(k) contribution may be bigger than a simple tax calculation suggests. For instance, the contribution might lower your adjusted gross income (AGI) just enough to qualify you for a tax break such as the tax credit for retirement-savings contributions, Piper says. With literally one fewer dollar of AGI, “suddenly you do qualify,” he says. This year, the Saver’s Credit is available to single filers with AGI up to $30,750 and couples filing jointly with AGI up to $61,500.

…Or smaller tax savings. On the flip side, the tax savings can also be less significant than you might think. Piper gives the example of a hypothetical taxpayer whose income is $1,000 over the level where the marginal rate rises from 15% to 25%. If this taxpayer put an additional $2,000 into a 401(k) this year, the first $1,000 would avoid tax at the 25% rate but the second $1,000 would avoid tax at 15%.

Run a hypothetical. If you use an online program or software to prepare your taxes, you can create a hypothetical tax return to see how a change in your 401(k) contribution would impact your overall tax situation, Piper says.

Make it easier. You’ll feel the impact of a bigger 401(k) contribution less if you do it concurrently with a pay raise, Taylor says. Plus, many employers allow you to automate the process by signing up for annual auto escalation of your contributions, which is “a really great feature,” she says.