Pretax deductions are those that you take out of your paycheck before taxes are calculated. They are excluded from your taxable income, so you pay less in income taxes. This can be a significant savings, especially if you have a lot of deductions. Some common pretax deductions include health insurance premiums, 401(k) contributions, and flexible spending accounts (FSAs). By taking advantage of pretax deductions, you can reduce your tax liability and increase your take-home pay.
What Taxes Are Pretax Deductions Exempt With
Pretax deductions are those taken off your paycheck before your taxable income is calculated. This can save you a significant amount of money in taxes, especially if you have a lot of eligible deductions.
Types of Pretax Deductions
The following are some common types of pretax deductions:
- Health insurance premiums
- Dental insurance premiums
- Vision insurance premiums
- Retirement contributions
- Child care expenses
- Commuter benefits
The specific types of pretax deductions that you are eligible for will depend on your employer and your plan. You can usually find this information in your employee benefits guidebook or by talking to your HR department.
Taxes That Pretax Deductions Are Exempt With
Pretax deductions are exempt from the following taxes:
| Tax | Description |
|---|---|
| Federal income tax | The tax that is withheld from your paycheck to fund the federal government |
| State income tax | The tax that is withheld from your paycheck to fund the government of the state in which you live |
| Social Security tax | The tax that is withheld from your paycheck to fund the Social Security program |
| Medicare tax | The tax that is withheld from your paycheck to fund the Medicare program |
By taking advantage of pretax deductions, you can reduce your taxable income and save money on your taxes. Be sure to talk to your HR department or a tax professional to find out which pretax deductions you are eligible for.
Retirement Savings
Retirement savings plans are a great way to save for your future and reduce your taxable income. Contributions to retirement plans are made on a pretax basis, which means that they are deducted from your paycheck before taxes are calculated. This can result in significant tax savings, especially if you are in a high tax bracket.
There are two main types of retirement savings plans: defined contribution plans and defined benefit plans.
- Defined contribution plans are the most common type of retirement plan. With a defined contribution plan, you contribute a fixed amount of money each year. The money you contribute and any earnings on it are invested in a retirement account. When you retire, you can withdraw the money from your account tax-free. There are two main types of defined contribution plans: 401(k) plans and IRAs.
- Defined benefit plans are less common than defined contribution plans. With a defined benefit plan, your employer promises to pay you a specific benefit when you retire. The amount of the benefit is based on your salary and years of service. Defined benefit plans are not as flexible as defined contribution plans, but they can provide a more secure retirement income.
The amount of money you can contribute to a retirement plan each year is limited. For 2023, the limit for 401(k) plans is $22,500 ($30,000 if you are age 50 or older). The limit for IRAs is $6,500 ($7,500 if you are age 50 or older).
If you withdraw money from a retirement plan before you reach age 59½, you will have to pay taxes on the withdrawal. You may also have to pay a 10% penalty. However, there are some exceptions to this rule. For example, you can withdraw money from a retirement plan without paying taxes or penalties if you use the money to pay for qualifying medical expenses or if you become disabled.
| Type of retirement plan | Contribution limit | Withdrawal age without penalty |
|---|---|---|
| 401(k) plan | $22,500 ($30,000 if age 50 or older) | 59½ |
| IRA | $6,500 ($7,500 if age 50 or older) | 59½ |
Thanks for reading! Hopefully, this article helped clear up any confusion about pretax deductions. If you have any other questions, be sure to leave a comment below or visit our website again soon. We’re always happy to help you make the most of your hard-earned money!