Here’s a scary fact about 401(k) matching contributions:

The money employers chip in often goes to the IRS, rather than the retiring employee.  Since 1984, the feds have taxed Social Security benefits. The threshold for taxation was set at $25,000 income for a single return and $32,000 for a joint filing.

Back then, only 1% of retirees made enough yearly income to have to paid taxes on their Social Security bennies. But that’s not the case anymore.

Here’s why: The feds never adjusted the regs for inflation. As a result, more and more retirees are affected with each passing year.

Example: The average Social Security check today is $1,048 a month, or $12,152 a year ($25,152 for a two-earner couple).

That’s still below the Social Security tax threshold. But guess what happens when you add the money cashed out from the average mature 401(k)? Exactly. The retiree owes taxes.

Four levels of taxation

How much tax does the retiree owe? There are four levels, depending on the person’s income status:

• Level 1: There are no Social Security taxes. Assuming a 15 percent tax rate on 401(k) income, the employee keeps 85 cents of every 401(k) dollar.
• Level 2: Roughly 50 cents of Social Security benefits are taxed for every dollar withdrawn from the 401(k). In real dollars, this means the employee keeps 77.5 cents of each 401(k) dollar, the feds get 22.5 cents.
• Level 3: The feds tax 85 cents of Social Security bennies, and the basic tax rate is 15%. Roughly 84% of the average employer 401(k) contribution goes to the IRS.
• Level 4: The Social Security tax remains 85 cents, but the basic tax rate jumps to 25%. The entire matching contribution is gone.