What are pretax contributions?
Pretax contributions are the amounts invested into your company retirement plan that are deducted from your paycheck before income taxes are calculated. By contributing to a 401(k), you can actually reduce the amount you pay in taxes each pay period. Pretax contributions help you lower your taxable income. Because of these tax advantages, the IRS puts certain restrictions on withdrawing this money before you reach age 59½. For example, if you earn $1,000 each paycheck, and you contribute 5% ($50), you are only taxed on $950. You don’t owe income taxes on the money until you withdraw it from the plan.
