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Pre-Tax Contribution

Pre-tax contributions are funds contributed to a retirement account before income taxes are deducted from your paycheck. These contributions are made with pre-tax income, meaning they reduce your taxable income for the year in which they are made.

What You Need To Know

Pre-tax contributions are commonly made to traditional retirement accounts, such as an employer-sponsored 401(k), Traditional IRA or a Traditional 401(k). The advantage of making pre-tax contributions is that they provide an immediate tax benefit. By reducing your taxable income, you lower the amount of income tax you owe in the current year. This can result in a lower tax bill and potentially increase your tax refund.

When you eventually withdraw funds from the pre-tax retirement account in retirement, the withdrawals are subject to income taxes. The idea behind pre-tax contributions is that you will likely be in a lower tax bracket in retirement, so you will pay less in taxes on the withdrawals than you would have during your working years.