Do your retirement plan contributions avoid FICA tax?
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Mike Bernard, CFP® offers advisory services through KFG Wealth Management, LLC dba Korhorn Financial Group. This information is for general financial education and is not intended to provide specific investment advice or recommendations. All investing and investment strategies involve risk, including the potential loss of principal. Asset allocation & diversification do not ensure a profit or prevent a loss in a declining market. Past performance is not a guarantee of future results….(read more)
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Do 401k Contributions Avoid FICA Tax?
When saving for retirement, many people turn to 401k plans as a popular and tax-advantaged option. One common question that arises when considering 401k contributions is whether they can help you avoid FICA tax, or the Federal Insurance Contributions Act tax. The FICA tax consists of both Social Security and Medicare taxes, and understanding how 401k contributions affect this tax is an important aspect of retirement planning.
Firstly, it’s important to understand that 401k contributions are made on a pre-tax basis, meaning that the money is taken out of your paycheck before taxes are withheld. This can help lower your taxable income, potentially reducing the amount of income subject to both federal and state income taxes in the year that the contributions are made.
However, when it comes to FICA tax, 401k contributions do not have a direct impact. The FICA tax is calculated based on an employee’s wages, which includes both salary and any pre-tax 401k contributions. In other words, contributing to a 401k does not reduce the amount of FICA tax that is withheld from your paycheck.
While 401k contributions may not directly impact FICA tax, they can still provide significant tax advantages. By reducing your taxable income, you may be able to lower your overall tax liability, including federal and state income taxes. Additionally, the money in your 401k grows tax-deferred, meaning that you won’t pay taxes on the investment gains until you withdraw the funds in retirement.
Furthermore, many employers offer a matching contribution for 401k plans, which can further boost your retirement savings. This is essentially free money that can help you reach your retirement goals more quickly.
In summary, 401k contributions do not avoid FICA tax, as the tax is based on an employee’s total wages, including pre-tax 401k contributions. However, contributing to a 401k can still provide valuable tax benefits and help you save for retirement in a tax-advantaged way. It’s important to consider all aspects of your retirement savings strategy, including the impact on taxes, in order to make informed decisions and work towards a secure financial future.
I’m retired with a pension but because of Biden and democrats I have to work in my retirement. I’m now forced to pay into social security and I’ll never see one penny of my contributions when I’m eligible to receive social security. I’m being ripped off by the government
The analogy that FICA is 12.4% and its not enough so therefore you need to put at least 15% in a 401K is weak. These are two mutually exclusive issues. SS is not invested effectively (thanks Uncle Sam). Yes people need to put at least 15% into tax deferred or tax free savings plans. The reason is: that it takes that much money to fund a reasonable retirement. Stop purchasing toys and cars every few years and you can save that 15%. Learn about Time Value of Money, Compounding and the destructive cost of a 1% AUM fee…buyer beware. "Money Does't Grow on Fees."