So how much cash is all this retirement contribution saving you, Max OOP?
Well, retirement contributions technically don’t save any tax – it is deferring tax until a later date. The goal is to use the deferred tax dollars to make money. You would then realize this as income at a point in the future when you’re in a lower tax bracket. Or, even better, take it during a year you are on sabbatical and not even in a tax bracket!
For the Max OOP crew, the tax deferral comes out to an even 22 cents on the dollar, or $4,180 in 2019.
You can get this deferral whether you front-load or spread out your retirement contributions nice and evenly all year.
Take Mr. and Mrs. OOP for example. After normal “average joe” deductions, we will land solidly in the 22% tax bracket for 2019 ($78,951 – $168,400). This, of course, assumes I don’t take a sabbatical or retire early in 2019 – then we may drift down into the 12% bucket.
So for every dollar we make over $78,950 in taxable income, Uncle Sam will hit us with a 22% federal tax (22 cents).
Putting $19,000 in my 403(b) retirement bucket prevents Uncle Sam from taxing it in 2019, thus deferring $4,180 in taxes for 2019. So instead of taking home just $14,820 – I get to keep my entire $19,000.
$19,000 X 22% = $4,180 Tax
In other words, I am telling Uncle Sam, “Hey buddy, let me keep my $4,180 for now and we can settle up later”. Uncle Sam says, “Sure, no problem, Max OOP. You can get me back later. I trust you are good for it. Want to go grab a beer with your $12 pay check?”
Perhaps I am good for it, but hopefully we settle up for much less than $4,180 in tax.
In the mean time, I can take my full $19,000 and invest the entire amount into over 500 of the best companies in America through my fancy VIIIX index fund. In turn, those companies will use it to make great products and services for us all to enjoy.
You don’t even have to thank me – those companies will thank me later by sharing their profits with me.
Max Out of Pocket on the $19,000 retirement contribution in 2019 = $0.00 in taxes
What tax bracket do you land in?