Understanding The Difference Between Pre-Tax and Post-Tax
As the names states, pre-tax deductions are the deductions applied to employees paycheck before taxes are assessed. These deductions are applied to your gross biweekly paycheck and reduce the amount of money that can be taxed locally, state-level, and federally. Pre-tax deductions are beneficial to employees because they lower a person’s tax liability ahead of time and they reduce the amount of money owed to Medicare and Social Security each pay period. These same pre-tax deductions can also be advantageous to employers as well. Below are some of the common pre-tax deductions that are normally accounted for in your paycheck.
- Health Care, Vision, and Dental Insurance premiums are pre-tax deductible. These contributions are non-taxable and they are paid to the appropriate accounts before taxes are assessed. Flexible Savings Accounts are often found under the pre-tax bracket as well.
- Pre-taxed investments are a common method used by the government to encourage people to save money ahead of time, rather than later. Many retirement programs are eligible for pre-tax deductions. These include investments such as 401K’s, IRAs and Health Savings Accounts. These are a great investment strategy because you don’t have to pay income tax on these accounts, and you also won’t have to pay taxes on the interest you earn. The only con in this strategy is that there usually is a limit on how much you and your employer can contribute to these accounts.
- Commuter benefits are also a popular pre-tax deduction. These benefits allow employees who have to commute each day to fund their transportation on a pre-tax basis through payroll deductions.
Post-tax deductions are those that do not impact the taxable wages that you have to pay. These deductions can include :
- Long Term Disability Payments, an insurance benefit designed to assist you with income if you have been sick or severely ill.
- Short Term Disability an insurance benefit that covers your expenses and helps with income for a limited amount of time.
- Life Insurance which provides relief to your designated beneficiaries in case you pass away.
- Roth investment and retirement accounts work a little different than traditional 401Ks. They are a special retirement account that you pay taxes on money going to your account and then your future contributions will be tax-free. The caveat here is that if you earn too much money, you will not be able to contribute to this account.
There also some less common deductions such as 529 College Savings Plans and Wage Garnishments. If you are not a part of your employer’s health insurance program, your premiums will be taxed as well. Learning about pre-tax deductions can give you a detailed synopsis of just how much money you may be saving, especially if you were not already contributing to some of those categories before. Maximizing your pre-tax deductions, compounded with matching employer contributions could be a great start to an investment strategy that could work well for you if done right. If you want to learn how you could be making the most of your pre-tax deductions, contact an SJK Wealth Management advisor, we would love to get started with you today.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.