Contributions to a 401(k) or any other retirement account are tax deductible. That means you exclude them from your income when you do your taxes. For example, if you make an average salary in your mid-30s of around $58,000, that puts you solidly in the 22% tax bracket. That’s an instant return on investment of 22%.
If you manage to save for retirement with a below-average income, the return can be even better. The government provides a credit for low-income households that contribute to a retirement account commonly referred to as the saver’s credit.
If your adjusted gross income (AGI) is less than $33,000 as an individual or $66,000 as a married couple, you qualify for the saver’s credit. This credit ensures you get at least a 22% return on your contribution in the form of deductions and credits, but it can go as high as 62% if you qualify for the 50% credit on your contribution.
Note that you can use the deduction from your retirement contributions to lower your AGI in order to qualify for the saver’s credit.
So if you get a 50% matching contribution and qualify for the 50% saver’s credit, you’ve already doubled your money. On top of that, you can take a tax deduction for the amount you contributed to retirement. And we haven’t even actually invested a dime yet.