How do salary deferrals or “pre-tax contributions affect my income taxes?
Each payroll period, the amount the employee has elected to contribute to the plan is automatically deducted from the employee’s paycheck and deposited to the plan by the employer. The amounts deferred by the employee are subject to FICA and FUTA taxes. However they are not subject to Federal, State, or local income taxes, except in Pennsylvania. Therefore a 401(k) Plan is an ideal way for an employee to reduce his taxable income while saving for retirement. Earnings on contributions to the plan also accumulate on a tax-deferred basis.
