Saving in your company's retirement plan means you are taking advantage of two powerful tax benefits. The first major tax benefit is that your contributions are conveniently deducted from your paycheck before you are taxed; since your reportable income is reduced, you end up paying less in current Federal income taxes. Second, your savings accumulate tax-deferred until you withdraw. For example, Kelly earns $2,000 per month and contributes $200 a month to her employer's plan (ten percent). She would pay income tax on only $1,800 ($2,000 - $200), instead of the entire $2,000 that she earned. (Kelly's entire $2,000 monthly earnings will be taxed for Social Security tax purposes, so her future Social Security benefit will not be reduced.) At an assumed tax rate of 35%, that's a $70 monthly tax savings, or $840 per year. Your tax savings will vary according to your tax bracket and contribution rate.