Before-tax contributions

Before-tax contributions

The portion of an employee's salary contributed to a retirement plan before federal income taxes are deducted; this reduces the individual's gross income for federal tax purposes.

Before-Tax Contributions

Contributions made to a retirement plan with taxable withdrawals. That is, when one makes before-tax contributions to a retirement plan, one does not pay taxes on the contributions in the year they are made, but defers taxation until one begins to make withdrawals from the plan. One makes before-tax contributions to traditional IRAs and most 401(k)s. See also: After-tax contributions.
References in periodicals archive ?
Before-tax contributions are deductible from current-year income, but the principal, interest, and capital gains are taxed at the ordinary income tax rate upon withdrawal.
Due to these differing tax treatments, making contributions to a Roth 401(k) is a better financial deal than making before-tax contributions for workers who expect to face a higher tax rate in the future (after age 591/2) than at the current time.
The Roth is more attractive if workers anticipate a possible withdrawal before age 591/2, since Roth principal is exempt from the 10 percent early withdrawal penalty that applies to before-tax contributions.
Section 125 plans also allow employees to make before-tax contributions to personal spending accounts that can be used for qualifying health-care or child-care expenses.
This is the reverse of the traditional 401(k) which allows employees to make before-tax contributions, but then fully taxes all retirement withdrawals (see chart, page 279).
However, these tax benefits still do not generally outweigh or overcome the tax advantages of making either after-tax contributions to a tax-free investment, such as a Roth IRA, or before-tax contributions to a tax-deferred investment, such as a 401(k) plan.
To determine the benefits of one type of IRA in contrast to another, equal before-tax contributions into portfolios with the same returns must be considered.
Therefore, for equivalent before-tax contributions, the Traditional IRA is better if the income earner is currently in a higher tax bracket than anticipated after retirement
Because equivalent before-tax contributions result in equivalent after-tax withdrawals for individuals in the same tax bracket before and after retirement, the Roth IRA has no advantage over the Traditional IRA.
A SAR SEP allows employees to make their own before-tax contributions towards retirement.
The main disadvantage of these plans, according to Rosen, is that you must follow all the IRS guidelines that govern them, as is the case for any IRS-qualified, before-tax contribution plan.
A 401(k) plan allows employees to save and invest for their own retirement by making before-tax contributions through a cash or deferred compensation arrangement.