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My goal here is to optimize my net worth, not cash on hand. With the understanding that higher net worth makes access to capital easier. So tax deferred options are appealing to me, as long as I can put that on a financial statement.

Lets say my Bi-Weekly period I make $6,000 of income (<- this number is for example purposes only so that we know that the 28% tax bracket is used)

Then from my understanding 28% of that is withheld by the employer for federal tax withholding, since I am a single person. (Don't worry about other deductions here)

The amount withheld is $6,000 * .28 = $1680 The amount leftover is $6,000 - $1680 = $4320

If I were to start a 401k (assume no matching), and put 15% of each pre-tax paycheck in it, then that would be

Amount into 401k is $6000 * .15 = $900 each pay period

Lowering my federal tax liability to $6000 - $900 = $5100

The taxable paycheck would be $5100, which would still be in the 28% tax bracket.

The amount withheld now would be $5100 * .28 = $1428 The amount leftover now would be $5100 - $1428 = $3672 plus the $900 in my 401K = $4572

Leaving me with a higher total net worth (total $4572 vs total $4320). Am I understanding how this works correctly? I realize I would reach the max contribution into a 401K, but thats fine

6

You are correct, by contributing to a 401(k), you will boost your net worth, since you will be paying less income tax (and your investments within the 401(k) will grow tax-deferred). Technically, you still have an undetermined deferred tax liability, since you will need to pay taxes on any withdrawals from your 401(k) you plan to make in the future.

You stated "higher net worth makes access to capital easier" -- I am assuming you mean that higher net worth will make banks more willing to lend to you. Generally speaking, this is correct, as well, but keep in mind that lenders may disregard any type of retirement account, since these funds are judgment proof. If you fail to repay a loan, banks cannot turn to your 401(k) to recover what is owed.

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    thank you, I just wanted to make sure my calculations were on the right track before I thought of anything with more variables – RD. Jul 9 '11 at 22:25
  • If the higher net worth is tied up in a retirement account, how does that make access to capital easier? In fact, 'access to capital' is what you are giving up when you contribute to a pension plan , a tax deferred account , a retirement account etc. – Victor123 Apr 8 '15 at 17:44

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