Pre-Tax (Before Tax)

Pre-tax means money is deducted from your paycheck BEFORE income taxes are calculated, lowering your tax bill today.

How Pre-Tax Contributions Work:

• Gross salary: $80,000
• Pre-tax 401(k): $10,000
• Taxable income: $70,000 (not $80,000)
• Tax savings: $2,400 (if in 24% bracket)

Common Pre-Tax Accounts:

1. Traditional 401(k):

• Contributions reduce current taxes
• Pay taxes on withdrawals in retirement

2. Traditional IRA:

• Deductible if income qualifies
• Taxed on withdrawal

3. HSA (Health Savings Account):

• Pre-tax going in
• Tax-free coming out (for medical expenses)
• Triple tax advantage

4. FSA (Flexible Spending Account):

• Pre-tax for healthcare/dependent care
• Use-it-or-lose-it annual limit

5. Pre-Tax Insurance Premiums:

• Health, dental, vision insurance
• Paid with pre-tax dollars through employer

Pre-Tax vs. Roth (After-Tax):

Pre-Tax Wins If:

• You're in high tax bracket now (24%+)
• Expect lower bracket in retirement
• Need to reduce current tax bill

Roth Wins If:

• You're in low bracket now (12% or less)
• Expect higher bracket in retirement
• Want tax-free growth forever

Example: Earn $100k, in 24% bracket:

• $10,000 pre-tax 401(k) → saves $2,400 taxes TODAY
• Same $10,000 Roth 401(k) → no tax savings today, but $0 taxes in retirement

Careful with "Tax Bomb" in Retirement: If all your savings are pre-tax, large Required Minimum Distributions (RMDs) at age 73+ can push you into high brackets. Diversification (some Roth, some pre-tax) helps.