What is a pre-tax 401k plan and do you deduct this from your gross income?

Question

What is a pre-tax 401k plan and do you deduct this from your gross income?

Answer 1

pre tax means that it's deducted before the income is taxed.  For example, you earn 1000 a pay period.  You have 100 deducted for the 401k.  Then the 900 balance is taxed.  The 100 is not taxed.  When you get  your w-2 at the end of the year, it will show total income and taxed income.  You will use the taxed income for income taxes, but you use total/gross income for loan, etc.

You should be saving at least the matching %.

Answer 2

A 401(k) plan is there for you to save for retirement, the funding for which is not taxed until you start withdrawing from it.  You do deduct your annual contribution from your gross income when you file with the IRS.

I encourage everyone to contribute as much as they can afford, as early in life as possible.  Social Security may not be so secure by the time you retire.

Answer 3

A 401K plan is a retirement savings plan through your employer.  Money will be taken pre-tax from your pay and put into the plan.  Many employers match a percentage of what you contribute, but not all do.

Since the money is taken out pre-tax, it won't be included in box 1 on your W-2 although it will show elsewhere on the form.  You don't deduct it again on your return - it's already deducted from what you'll show on your tax return.

There are restrictions on the amount you can put in per year, and restrictions on taking it out before retirement.  When you take it out after you retire, you'll pay tax on the money you withdraw.