Why does it cost me less than $1 to save $1?

If you save money in a traditional 401k plan or IRA account, the money goes into your account without paying tax. So, for example, if you save $1,000, and your tax rate is 30%, $700 would go into your checking account if you take it as taxable pay and $300 would go to tax. However, if you instead contribute $1,000 to your retirement account, the full $1000 goes to your account, and your paycheck is only reduced by $700, since you don’t pay the tax. That’s how it costs you less than $1 to save $1. Later, in retirement, you pay tax on that money when you spend it, but until then, it grows tax-free, which helps you grow your savings faster. If you use a Roth 401k or Roth IRA, it’s the reverse… the tax is paid up front and not during retirement (see below for more on Traditional vs. Roth).