A provision of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 decreased the employee portion of the Social Security tax from 6.2 percent to 4.2 percent for 2011. Now you have a rare opportunity for to increase your 401(k) contribution without any change in your net take-home pay in 2011 when compared to 2010.
More Retirement Savings
One of the most attractive features of using the temporary Social Security tax break as a 401(k) contribution is that tax is not withheld against that 2 percent of your pay when put into a 401(k).
So if you make $50,000 per year and increase your 401(k) contribution by 2 percent, you will actually have $174 more in take home pay at the end of the year, as well as $1,000 more in your retirement savings account.
If you made the same $50,000 this year and placed your 2 percent savings into a Roth IRA, you would have the same net pay at the end of the year as you did in 2010 (your 2 percent being added to the Roth would be taxed as normal income), however the additional earnings on the $1,000 you placed into the Roth IRA would never be taxed in the future as long as the plan rules are followed.
Increase Retirement Savings
Either way, you can increase the balance in your retirement account without any financial sacrifice to your 2011 net take-home pay. Just be sure to check on the other withholding changes that may impact your net pay before you change your contribution. Observe your employer’s deadline for changing your contributions and take advantage of this painless way to increase your retirement savings.