Income and Investments Understanding Pre-Tax Dollars Read the Article Open Share Drawer Share this:Click to share on Facebook (Opens in new window)Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Pinterest (Opens in new window)Click to print (Opens in new window) Written by Ginita Wall Published Apr 6, 2018 - [Updated Jun 11, 2024] 2 min read Pre-tax, after-tax, who cares? Everything gets taxed, right? Well, not always. There are some employee benefits that are never taxed, and you can also benefit from deferring taxes for many years. Benefits That Aren’t Taxed: If an employer pays the cost of medical or dental insurance for its employees and their dependents, those payments are not taxed to the employee for either income or payroll taxes. Other non-taxable benefits you can receive from your employer include employee discounts, health club benefits, meals on the premises, some child care benefits, and employee parking. Voluntary contributions to Section 125 plans for medical costs, child care and the like are also never taxed if the funds are used for those expenses. Funds That Are Taxed Later: When you make contributions to your employer’s 401(k) plan, your contributions aren’t currently taxed. That means the money that would ordinarily have gone to income taxes can be invested to grow in your 401(k) plan. Sure, you’ll have to pay tax on that money down the road when you draw it out, but meanwhile, over time it will go up in value, and you’ll get to keep the earnings that remain after paying those taxes. And it is likely that your taxable income will be less in retirement, so you’ll be in a lower tax bracket than you are now. (Note that contributions to 401(k) plans are currently taxed for payroll taxes such as social security, Medicare and the like). Earnings That Are Never Taxed: If you make contributions to a Roth 401(k) plan, you’ll still have to pay tax now on the funds you put in. The big tax advantage is that the growth on those funds is never taxed in the future so you can draw those funds out tax-free in retirement. That’s a big advantage for younger savers who have years and years to save for retirement and lots of tax-free growth on those savings ahead of them. For older savers, the current tax savings offered by a tax-deferred 401(k) is a better bet. What Tax-Deferred Savings Mean for You: Let’s say that 25% of your wages are withheld for federal and state income taxes, and that you determine you can spare $100 from your net paycheck to save for the future. You could just take $100 from your net pay and set it aside in an investment, but here’s a better idea: If you contribute that $100 to a pre-tax plan such as your 401(k) plan at work, because that $100 isn’t currently taxed, you are saving $25 in current income taxes. Still have questions? Don’t worry about knowing these tax rules. Meet with a TurboTax Full Service expert who can prepare, sign and file your taxes, so you can be 100% confident your taxes are done right. Start TurboTax Live Full Service today, in English or Spanish, and get your taxes done and off your mind. Previous Post 5 Ways to Save Your Green on St. Patrick’s Day Next Post Happy Earth Day! 5 Easy (and Free!) Ways to Protect… Written by Ginita Wall More from Ginita Wall Leave a ReplyCancel reply Browse Related Articles Income and Investments Are Social Security Benefits Taxable? Income and Investments Bonus Time: How Bonuses Are Taxed and Treated by the IR… Income and Investments How are Unemployment Benefits Taxed? Taxes 101 Taxes 101:Tax Brackets Tax Planning How Bonuses Are Taxed: A Complete Guide 401K, IRA, Stocks What Happens to Employees When a Company Goes Public? Income and Investments Taxes on Stocks 101: What You Need to Know About Sellin… Income and Investments What Is Supplemental Income? Investments Essential Tax Tips for Maximizing Investment Gains 401K, IRA, Stocks Tax Tips for First-Time Investors: Stocks & Taxes