Use Reduced Social Security Taxes to Boost Your 401(k)

Your January paycheck should be a bit bigger. Last month, President Obama signed a law to extend the Bush-era tax cuts which include a one-year reduction in workers’ Social Security taxes. This change reduces Social Security taxes from 6.2 percent to 4.2 percent for 2011. If you earn $50,000 per year, expect savings of approximately $1000 in Social Security taxes.

How should you spend this gain in take-home pay? If you participate in a 401(k) plan, this is a great time to increase your plan contribution while taking advantage of the reduction in Social Security withholding. Increasing your 401(k) contribution in a non-Roth retirement plan will reduce your taxable income and provide savings in federal and state income tax.

This is a great opportunity to increase your 401(k) deduction without feeling the pinch in your paycheck.