401(k) Tax Advantages

A member will be able to reduce his or her individual tax burden by allowing investments to build up in the BACSAVE 401(k) Plan since the Plan is actually a pre-tax account. What are the advantages of saving through a pre-tax 401(k) plan in dollars and cents? Simply, the money members voluntarily contribute to a 401(k) plan is subtracted from their gross pay before federal and most state income taxes are withheld. As the following example shows, a member with annual earnings of $30,000 who wants to save $1,500 during the year would take home $217 more in their take-home pay by saving in the 401(k) than if he or she tried to save the same amount using a taxable savings account.

The $217 is the federal tax savings—but there would also be additional state-level tax savings since most states also defer taxation on contributions to 401(k) plans. In addition to the immediate tax savings, the earnings potential under a tax- deferred account—such as the BACSAVE 401(k) Plan—is greater than a taxable savings account. Again, let’s look at an example. Members "A" and "B" both save $100 per month for 20 years. At the end of 20 years both have put aside $24,000 and both have earned an 8% rate of return on their investments.

Member "A" invested in a 401(k) plan. The monthly contributions were before taxes and the earnings on the investments were not taxed. At the end of 20 years, Member "A’s" $20,000 investment had grown to $59,925.

Member "B" in contrast, invested in a taxable savings arrangement -- a typical savings account. The monthly contribution was made after taxes, and the earnings on the investments were taxed. At the end of 20 years, Member "B’s" $20,000 investment had grown to only $32,492.

While tax deferred does not mean "tax free," chances are that by the time you pay taxes you will be retired and consequently in a lower tax bracket.