Pre-tax means "before income tax" — not before everything
A traditional 401(k) deferral comes out of your paycheck before federal and state income tax are computed. Your W-2 Box 1 taxable wages drop by the deferred amount — but your Social Security and Medicare wages (Boxes 3 and 5) do not. You keep paying FICA on the full gross. The 2026 elective deferral limit is $24,500 (IRS Newsroom, November 2025; catch-up contributions for 50+ are additional and outside this engine's scope).
The math on a $60,000 salary
Deferring $6,000 a year (10% of gross) in California, single filer:
| Annual | No 401(k) | $6,000 deferred |
|---|---|---|
| 401(k) contribution | $0.00 | $6,000.00 |
| FICA (unchanged) | $4,590.00 | $4,590.00 |
| Federal income tax | $5,020.00 | $4,300.00 |
| CA state income tax | $1,792.53 | $1,432.53 |
| Take-home | $47,817.47 | $42,897.47 |
You saved $6,000 for retirement — but your take-home only dropped by $4,920.00 ( $189.23 per biweekly check). The $1,080.00 gap is the tax you did not pay this year: $720.00 federal and $360.00 state. Every deferred dollar in this example cost about 82.00% of paycheck.
Per-paycheck mechanics
Payroll does the same math each period: your per-check deferral comes off gross, tax is computed on the remainder, then the deferral is subtracted as a deduction line. So the « cost » of a 10% election on this salary is $189.23 less per biweekly check while $230.77 goes into the account — the rest is the tax you stopped paying on the spot. Electing a percentage of pay rather than a flat amount keeps the deferral tracking raises automatically.
Why the discount is exactly your marginal rate
The saving equals your marginal tax rate — the rate on your last taxable dollar — not your average rate. Here the deferred income sat in the 12% federal bracket and CA's ~6% zone: roughly 18% back. A single filer near the 22% boundary sees a bigger discount; a filer in a no-income-tax state gets only the federal part. Push the deferral far enough and it can also drop you into a lower bracket — the saving then blends two marginal rates.
A state-level wrinkle
Most states follow the federal treatment and exclude 401(k) deferrals from state taxable wages — California does, which is why the state tax line dropped in our table. Two notable exceptions: Pennsylvania and New Jersey tax your contributions now (and then don't tax qualified withdrawals later). The engine models the common treatment; check the state notes on the methodology page for the fine print.
Traditional vs Roth: same limit, opposite timing
The $24,500 deferral limit is shared between traditional and Roth 401(k) contributions. Traditional takes the tax break now and pays ordinary income tax on withdrawals; Roth pays full tax today and withdrawals — including decades of growth — come out tax-free. The rule of thumb: Roth makes sense if your marginal rate today is lower than you expect in retirement, traditional if it is higher. Many employers let you split between both.
The match is separate — and it is the best deal in the system
Employer matching contributions do not count against your $24,500 elective deferral limit (they fall under the much higher overall §415 limit). A typical « 50% of the first 6% » match means deferring $3,600 of our $60,000 salary adds $1,800 of employer money on top — an instant 50% return before any market growth, plus the $1,080.00-style tax saving. Not contributing up to the match is leaving salary on the table.
What this does not capture
The deferral is tax-deferred, not tax-free: withdrawals in retirement are taxed as ordinary income. Roth 401(k) contributions work the other way — full tax now, nothing later. Employer matching is free money outside this example entirely. Finally, remember FICA is unaffected: only income tax shrinks. Compare scenarios in the salary calculator and see methodology for sources. Indicative estimate computed with the official parameters in force — not a pay slip, and not tax or legal advice.