How a 401(k) Contribution Changes Your Take-Home Pay (Real Numbers)

The most common reason people under-contribute to a 401(k) is a mental arithmetic error: they assume that putting $400 a month into the plan means $400 a month less in the bank. It does not. A traditional 401(k) contribution is deducted before federal income tax and, in every state we model except one, before state income tax. The cash-flow cost of the contribution is the contribution minus the tax it avoids. Here is what that looks like at three salaries in three cities, using the same engine as the slider on every audit page.

The mechanism

Your employer takes the contribution out of gross pay first. Federal income tax is then computed on what is left. So a $400 contribution by someone in the 22% federal bracket lowers federal tax by $88, and if they live in a state with a 5% marginal rate, state tax by another $20. The $400 that went into the plan cost $292 of take-home. The other $108 is tax that was never paid.

Two things do not move. FICA — Social Security and Medicare — is computed on wages before the 401(k) deduction, so the contribution does not lower it. And the money is not tax-free, only tax-deferred: it is taxed as income when withdrawn in retirement, at whatever rate applies then.

$80,000 in Austin, New York City and Philadelphia

	No contribution	6% ($400/mo)	Cash-flow cost	10% ($667/mo)	Cash-flow cost
Austin	$5,426/mo	$5,114/mo	$312/mo	$4,906/mo	$520/mo
New York City	$4,868/mo	$4,593/mo	$275/mo	$4,409/mo	$458/mo
Philadelphia	$4,972/mo	$4,660/mo	$312/mo	$4,452/mo	$520/mo

Austin has no state tax, so the only saving is federal: contributing $400 costs $312, a 22% discount. New York City has a 5.4% state marginal rate and a city tax that is also computed on state taxable income, so the same $400 costs only $275 — the state and city layers both shrink. Philadelphia is the anomaly and is discussed below.

$120,000: the discount is the same, the amounts are larger

At $120,000 the federal marginal rate is still 22%. Six percent is $600 a month; in Austin it costs $468, in New York City $409, in Philadelphia $468. Ten percent is $1,000 a month and costs $780, $682 and $780 respectively. The proportional saving is what it was at $80,000, because the marginal rates have not changed.

$200,000: the 24% bracket and the limit

At $200,000 the federal marginal rate is 24%, and California’s state rate is 9.3%, so a San Francisco earner contributing 6% ($1,000 a month) gives up only $667 of take-home — a third of the contribution is tax that would otherwise have been paid. Ten percent would be $20,000 a year, under the $24,500 limit; in San Francisco that costs $1,112 a month for $1,667 a month saved.

Above $245,000 the 10% figure would exceed the 2026 elective deferral limit of $24,500, and the slider on each audit page caps at that limit. Employer matching contributions do not count toward it.

The Pennsylvania exception

Pennsylvania is the one state in our set that treats 401(k) deferrals as taxable compensation. A Philadelphia earner’s contribution still reduces federal tax, but the state’s flat 3.07% and the city’s 3.74% wage tax are computed on gross wages before the deferral. On $100,000 with a 10% contribution, federal tax falls from $13,170 to $10,970, but Pennsylvania tax stays at $3,070 and Philadelphia’s wage tax stays at $3,740. The cash-flow discount is federal only — which is why Philadelphia’s numbers in the table match Austin’s, not New York’s. (Pennsylvania does not tax the withdrawals in retirement either, which is the other side of the same rule.)

Pre-tax health premiums are better still

Section 125 cafeteria-plan deductions — the employee share of health, dental and vision premiums, and FSA contributions — come out before income tax and before FICA. A $300-a-month premium on $100,000 in Austin costs $211 a month in take-home: the $300 avoids 22% federal tax and 7.65% FICA. That is a bigger discount than a 401(k) contribution gets, and it is why every audit page has a separate slider for it.

Using the slider

Every audit page has both sliders. The “tax saved vs. baseline” line is the tax you avoid; the “cash-flow cost of saving” line is the real reduction in your monthly deposit. If the second number is much smaller than the amount you are putting away, the plan is working as designed. The employer match — which does not appear on the slider because it is not your money until it vests — sits on top of all of it.