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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Wednesday, August 02, 2006

Retirement: Pre-tax Savings

Another important aspect of investing in your retirement is tax-deferred plans are allowed to be deducted from your paycheck before the goverment takes out any taxes. Pre-tax contributions to a retirement plan will often reduce the amount of taxes you pay each year.

The government wants to encourage citizens to invest in their retirement and this is a main reason why you can make pre-tax contributions to your qualified reirement plan. This benefit might increase the amount of money you keep after taxes and savings are considered.

An example of this benefit would be to assume you make $75,000 annually and you set aside 8% of your pre-tax wages per year for retirement. Another earning the same amount and same contribution contributes 8% of pre-tax wages per year to a 401k plan at work. Both invest the same, but the pre-tax investor will tax home earnings of almost $2,000 more a year.

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