Pre-tax contributions are those made to an assigned retirement account, pension plan, or another type of tax-deferred investment account in which employees make contributions before federal and state taxes deductions, such as investing in a 401(k) plan. The main tax advantage for employees is contributing to the retirement plan with money that hasn’t been assessed with payroll taxes, allowing them to reduce their tax burden. Pre-tax contributions facilitate postponing paying taxes on the contribution amount and earnings as long as the funds remain in the account. When funds are withdrawn at retirement, taxes will be assessed but often at a lower rate.
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