Understanding pre-tax deductions

For example, if you earn $100,000 and contribute $10,000 to a 401(k), your taxable income is reduced to $90,000. This saves you approximately $2,400-$3,000 in taxes (depending on your tax bracket), while the $10,000 goes directly to your retirement account.

The key benefit: You're saving for retirement (or other goals) with pre-tax dollars, meaning you avoid paying taxes on that money now. You'll pay taxes when you withdraw it in retirement, but you'll likely be in a lower tax bracket then.

Each of these reduces your taxable income, which means less tax withheld from each paycheck.

• 401(k) or 403(b) retirement contributions: Up to annual limits ($23,000 in 2026 for most people, plus catch-up contributions if you're 50+)
• Health insurance premiums: Your portion of employer-sponsored health insurance
• Health Savings Account (HSA) contributions: If you have a high-deductible health plan, you can contribute up to $4,150 (individual) or $8,300 (family) in 2026
• Flexible Spending Account (FSA) contributions: For healthcare or dependent care expenses, up to $3,200 (healthcare) or $5,000 (dependent care) in 2026
• Commuter benefits: Up to $315 per month for transit and parking
• Dental and vision insurance premiums: Your portion of employer-sponsored plans

For example, if you contribute 10% to a 401(k) on a $100,000 salary:

In effect, you're getting a 24-30% 'discount' on your retirement savings through tax savings. This is why maximizing pre-tax deductions is one of the most effective ways to reduce your tax bill.

• 401(k) contribution: $10,000 annually ($385 per bi-weekly paycheck)
• Taxable income reduction: $10,000
• Tax savings: Approximately $2,400-$3,000 (depending on your bracket)
• Net impact: You 'lose' $385 from your paycheck, but save $2,400-$3,000 in taxes, and have $10,000 in your 401(k)

Pre-tax (Traditional 401(k)): Contributions reduce your taxable income now. You pay taxes when you withdraw in retirement. Best if you expect to be in a lower tax bracket in retirement.

Post-tax (Roth 401(k)): Contributions don't reduce your taxable income now. Withdrawals in retirement are tax-free. Best if you expect to be in a higher tax bracket in retirement.

Many employers offer both options, and you can contribute to both. The choice depends on your current tax situation and retirement goals.

Remember: Pre-tax deductions reduce your take-home pay, so make sure you can afford the reduction. But the tax savings often make them worth it, especially for retirement savings.

• Contribute enough to your 401(k) to get your employer's full match (if offered)
• Max out your HSA if you have a high-deductible health plan (triple tax advantage: pre-tax contributions, tax-free growth, tax-free withdrawals for medical expenses)
• Use FSA for predictable healthcare or dependent care expenses
• Take advantage of commuter benefits if you use public transit or pay for parking
• Review your deductions annually to ensure you're maximizing tax savings

To make the most of pre-tax deductions:

1. Review your current deductions: Check your pay stub to see what pre-tax deductions you're currently taking. Make sure you understand each one.
2. Maximize your 401(k) match: If your employer offers a 401(k) match, contribute at least enough to get the full match. This is free money on top of tax savings.
3. Consider increasing contributions: If you can afford it, consider increasing your 401(k) or HSA contributions. The tax savings make these contributions highly valuable.
4. Use our calculator: See how different pre-tax deduction amounts affect your take-home pay and tax savings.
   Take-Home Pay Calculator
5. Review annually: Tax limits and your financial situation change. Review your pre-tax deductions annually to ensure you're maximizing benefits.