Model Pre-Tax Contribution Cash Flow
Estimate the cash-flow impact of a pre-tax contribution increase before changing payroll deferrals.
Sofia earns $9,000 per month. She contributes 5% to her 401(k), or $450 monthly. She is considering 9%, or $810 monthly. For teaching only, assume a rough 24% combined marginal tax effect and ignore other payroll interactions. Approximate paycheck impact = extra pre-tax contribution - estimated tax offset, then test the result against cash-flow constraints. The common trap is thinking pre-tax means painless. The contribution may reduce taxes, but it still reduces take-home pay. Current deferral $9,000 x 5% = $450 per month This is the current payroll contribution. Proposed deferral $9,000 x 9% = $810 per month This is…
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