What will my paycheck look like after the required
1% pre-tax retirement contribution?
The University of Arkansas 403(b)/457(b) Retirement Plan, the “UARP,” is a great opportunity for tax-advantaged
investing. Our plan allows you to save for retirement right out of your paycheck. There are two important
advantages. First, UAMS matches your contributions, dollar for dollar, from 5% to 10% (up to limits set by the IRS).
Second, you can contribute to the plan with money that hasn’t been hit with federal or state payroll taxes yet – that
is, you make pre-tax (also called tax-deferred) contributions. You can also elect to make voluntary after-tax
contributions to a Roth 403(b); visit our website,www.hr.uams.edu for more details.
The following calculation can be used by an employee who currently does not make personal
contributions to their TIAA-CREF or Fidelity account through the UA Retirement Plan.
What is your gross pay, before taxes or any deductions?
Not sure? Log into Employee Self Service to look at your paystub.
Let’s use an example of $1,000.
Multiply your gross pay by .01 (which is 1%).
$1,000 x .01 = $10
This means for every $1,000 of your earnings, $10 will be deducted from your paycheck and go
to the fund sponsor you elected, TIAA-CREF or Fidelity. (By the way, you can change your fund
sponsor at any time).
Does this mean my net take-home pay will be exactly $10 less per each $1,000 I earn?
No. That’s the beauty of a pre-tax deduction. The 1% required retirement contribution is
deducted on a before-tax basis, meaning it comes out before federal and state taxes are
calculated. Less of your gross pay is being taxed. (Note that a pre-tax retirement deduction
reduces only your federal and state taxable income; it does not reduce your wages subject to
Social Security and Medicare taxes.)
What tax bracket are you in?
In other words, what percent of your salary do your deductions for “Federal Withholding Tax”
and “AR Withholding Tax” represent?
To calculate this, add up those two taxes, then divide by your gross pay. This percent will vary
by employee, depending on if you claim single or married, and how many allowances you claim.
(By the way, you can update your withholding elections on-line via Employee Self Service at any
time.)
Using our $1,000 example above, let’s say your federal and state taxes combined are $200. 200
divided by 1,000 = .2, which is 20% tax bracket.
Final step, apply your tax bracket percent to your 1% retirement contribution.
Using our example above, a 1% pre-tax retirement deduction on $1,000 of pay is $10.
$10 x .2 = $2
$2 is how much less your tax deduction will be, because that $10 is removed from your taxable
income. So the $10 deduction really only cost you $8.
Bottom line
For every $1000 you earn, you’ll save $10 toward your retirement. But it will cost you a little
less than that because of the tax savings.
Let’s look at a sample paystub
This person is paid $1,000 every two weeks and pays for their insurance on a pre-tax basis. Federal and
State taxes represent 20% of their pay (remember, your situation may be different).
OLD - 0% contribution to Retirement
NEW - 1% contribution to retirement
Gross pay $1,000
- $172.00 pre-taxed insurance
- $0 pre-tax retirement
Reduces their taxable income to $828
- $165.60 taxes (828 x .2)
Gross pay $1,000
- $172 pre-taxed insurance
- $10 pre-tax retirement
Reduces their taxable income to $818
- $163.60 taxes (818 x .2)
= $662.40 net pay
-
= $654.40 net pay
$10 went to employee’s TIAA-CREF or Fidelity account. But their take-home pay was decreased by the
smaller $8 amount.
bg 2-19-2016