The Pre-Tax Advantage of 401(k) Plans (And Why It’s Changing for Some)
Hello, fellow savers for retirement! If you’ve ever wondered if your 401(k) contributions are tax-free, you’ve come to the right place. Recent changes to retirement tax laws have made this question more difficult than ever to answer. Let’s go over everything you need to know about how your 401(k) contributions are taxed.
Yes, most traditional 401(k) contributions are made before taxes. But there’s a big change coming in 2026 for people with high incomes that you need to know about!
What Does “Pre-Tax” Actually Mean?
When we talk about “pre-tax” contributions, we’re referring to money that goes into your retirement account before income taxes are taken out This creates an immediate tax benefit by reducing your taxable income for the current year
For example, if you make $75,000 per year and contribute $10,000 to your pre-tax 401(k), you’ll only be taxed on $65,000 of income This can potentially lower your tax bracket and definitely reduces your tax bill for the year
But don’t get too excited—this isn’t a free lunch from Uncle Sam. It’s more like a tax deferral program. You’ll eventually pay taxes on this money when you withdraw it during retirement.
The Basic Tax Treatment of 401(k) Plans
According to the IRS, a traditional 401(k) plan allows eligible employees to make pre-tax elective deferrals through payroll deductions. These key points apply to pre-tax 401(k) contributions:
- Not subject to federal income tax withholding when contributed
- Not reflected as taxable income on your Form 1040
- Reported on your W-2 form as retirement contributions
- Still subject to FICA taxes (Social Security and Medicare)
- Tax-deferred growth until you withdraw the money
This arrangement offers two major advantages:
- Your contributions and investment gains aren’t subject to federal income taxes until distributed
- Your elective deferrals are always 100% vested (meaning the money is yours even if you leave your employer)
Types of 401(k) Plans and Their Tax Treatment
There are several types of 401(k) plans with slightly different rules:
| Plan Type | Pre-Tax Treatment | Key Features |
|---|---|---|
| Traditional 401(k) | Yes | Subject to annual nondiscrimination tests |
| Safe Harbor 401(k) | Yes | Exempt from nondiscrimination tests, requires employer contributions |
| SIMPLE 401(k) | Yes | For small businesses (100 or fewer employees) |
| Roth 401(k) | No | After-tax contributions, tax-free withdrawals in retirement |
Most companies with 401(k) plans now offer both traditional (before taxes) and Roth (after taxes) options. This gives workers choices in how they handle their taxes.
Contribution Limits for 401(k) Plans
For 2024, here’s what you can contribute to your 401(k):
- Regular contributions: $23,500 for workers 49 and younger
- Catch-up contributions: Additional $7,500 for workers aged 50-59
- “Super” catch-up contributions: Additional $11,250 for workers aged 60-63
These limits generally increase periodically to account for inflation. For 2026, consulting firm Milliman predicts the general limit could increase to $24,500, with the catch-up limit potentially rising by $500.
The Big Change Coming in 2026: Catch-Up Contributions Going Roth
Now things start to get interesting! The IRS and Treasury Department just finished making rules that will change how higher earners use catch-up gifts.
Starting in 2026, if you earn more than $145,000 in FICA wages (the income subject to Social Security and Medicare taxes), any catch-up contributions you make to your 401(k) will automatically be treated as Roth contributions.
In other words, these catch-up contributions will be:
- Made with after-tax dollars
- Subject to income tax in the year you make them
- Tax-free when withdrawn in retirement (assuming certain conditions are met)
This is a significant change from the current system, where catch-up contributions can be made with pre-tax dollars regardless of income level.
Who Will Be Affected by the Catch-Up Contribution Change?
This change will primarily impact:
- Workers age 50 and older
- Those earning more than $145,000 annually
- Individuals who make catch-up contributions to their 401(k) plans
If your employer doesn’t offer a Roth 401(k) option, you may lose the ability to make catch-up contributions altogether once this rule takes effect.
According to Fidelity, only about 8.6% of all retirement savers hit the maximum contribution limit that’s required before they can even start making catch-up contributions. So while this change is significant, it won’t affect the majority of retirement savers.
Why Is This Change Happening?
The change is part of the Secure 2.0 Act of 2022, which made numerous adjustments to retirement saving rules. The original implementation date was supposed to be 2024, but the IRS delayed the rule to give employers and plan sponsors time to prepare.
This modification essentially means that higher-earning older workers will have to pay more taxes during their peak earning years instead of deferring those taxes until retirement.
The Silver Lining of the New Catch-Up Rules
While paying taxes upfront might seem like a disadvantage, there’s actually a bright side to having some Roth savings in your retirement portfolio:
- Tax diversification: Having both pre-tax and Roth money gives you more flexibility in retirement
- No required minimum distributions (RMDs): Roth 401(k) money is not subject to RMDs under Secure 2.0
- Tax-free withdrawals: Once you’ve paid the taxes, you won’t owe anything on qualified withdrawals
- Potentially lower tax liability in retirement: You won’t have to worry about these funds increasing your taxable income when you’re on a fixed income
As Michael Shamrell from Fidelity points out, “At the end of the day, you want to get as much savings set aside as possible. The fact that you’re contributing, that’s the biggest and most important step.”
Is Your 401(k) Contribution Still Worth It?
Absolutely! Even with the changes to catch-up contributions, 401(k) plans remain one of the most powerful retirement savings tools available. Here’s why:
- Employer matching: Many employers match a portion of your contributions (free money!)
- Higher contribution limits than IRAs
- Automatic payroll deductions make saving easier
- Potential tax advantages (either now or in retirement)
- Protection from creditors in many situations
What Should You Do Before 2026?
If you’re a higher earner who might be affected by the catch-up contribution change, consider these steps:
- Max out your pre-tax contributions while you still can
- Talk to a financial advisor about your specific situation
- Evaluate whether Roth or traditional contributions make more sense based on your expected retirement income
- Check if your employer offers a Roth 401(k) option
- Consider other tax-advantaged savings options like health savings accounts (HSAs)
Final Thoughts: Is a 401(k) Pre-Tax?
To wrap this all up with a neat bow—yes, traditional 401(k) contributions are generally pre-tax, meaning they reduce your taxable income in the year you make them. However, starting in 2026, catch-up contributions for higher earners will automatically be treated as after-tax Roth contributions.
This mixed approach actually offers some advantages by creating tax diversification in retirement. You’ll have some money that’s already been taxed (Roth) and some that will be taxed when withdrawn (traditional).
Remember, the most important thing is simply to save for retirement, regardless of the tax treatment. As the old saying goes, “The best time to plant a tree was 20 years ago. The second best time is now.” The same applies to retirement savings!
Have you started thinking about how these changes might affect your retirement strategy? I’d love to hear your thoughts in the comments below!
Disclaimer: I’m not a tax professional, and everyone’s situation is different. For personalized advice, please consult with a qualified financial advisor or tax professional.
Safe harbor 401(k) plan
A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, it must provide for employer contributions that are fully vested when made. These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals. The safe harbor 401(k) plan is not subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans.
Employers sponsoring safe harbor 401(k) plans must satisfy certain employee notice requirements. The notice requirements are satisfied if the employer provides each eligible employee with written notice of the employees rights and obligations under the plan and the notice satisfies content and timing requirements.
In order to satisfy the content requirement, the notice must describe the safe harbor method used, how eligible employees make elections, any other plans involved, etc.
The timing requirement requires that the employer must provide notice within a reasonable period before each plan year. This requirement is deemed to be satisfied if the notice is provided to each eligible employee at least 30 days and not more than 90 days before the beginning of each plan year. There are special rules for employees who become eligible after the 90th day.
Any employer, no matter how big or small, can join either the traditional or safe harbor plan. These plans can also be used with other retirement plans.
Small businesses needed a way to give their employees retirement benefits that wouldn’t cost a lot of money, so the SIMPLE 401(k) plan was made. A SIMPLE 401(k) plan is not subject to the annual nondiscrimination tests that apply to traditional 401(k) plans. As with a safe harbor 401(k) plan, the employer is required to make employer contributions that are fully vested. This type of 401(k) plan is available to employers with 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding calendar year. Employees who are eligible to participate in a SIMPLE 401(k) plan may not receive any contributions or benefit accruals under any other plans of the employer.
For more information on traditional, safe harbor and SIMPLE 401(k) plans, see Publication 4222, 401(k) Plans for Small Businesses PDF.
Restriction on conditions of participation
Any 401(k) plan cannot require, as a condition of participation, that an employee complete more than 1 year of service.
Pre-Tax Or Roth: How Should You Contribute To Your 401(k)?
FAQ
Is a 401k pre or after tax?
These kinds of features are like the ones that most investors can get through their own Individual Retirement Accounts (IRAs). In general, a traditional 401(k) or IRA account lets you save money before taxes so that it can grow tax-free.
Is a 401k taxed before or after?
People who have tax-deferred 401(k) plans save some of their pay before federal and state income taxes are taken out. These plans save you taxes today. When you put money into a 401(k) from your take-home pay, your taxable income goes down. This means you pay less income tax now.
Is a 401k catch up pre-tax or after tax?
But, starting next year, if you’re over 50 and made more than $145,000 in FICA wages — which is the income subject to Social Security and Medicare taxes — in the prior year, any so-called “catch-up contributions” you make will automatically be subject to income tax.
Does 401k reduce taxable income?
What is a 401(k) plan? A 401(k) is a type of retirement account that allows employees to set aside a portion of their paycheck, often before taxes are taken out. This means your 401(k) contributions reduce your taxable income, saving you money now.
What is the difference between a pre-tax and after-tax 401k?
If you have a traditional 401 (k), your pre-tax contributions generally are rolled over into a traditional IRA. Any withdrawals are taxed as ordinary income. If you have an after-tax 401 (k), your contributions can be rolled over into a Roth IRA.
How much can you contribute to a pre-tax 401k?
You contribute 10% of your salary to a pre-tax 401 (k). You have 0 allowances. If you contribute $187 per paycheck (10%), you would take home $1,304 after taxes. This pre-tax 401 (k) contribution only reduces your paycheck by $152 from what it would be if you didn’t contribute.
What are the benefits of a pre-tax 401k?
A pre-tax 401 (k) could be the right choice if you expect to retire in a lower tax bracket. Your 401 (k) contributions directly reduce your taxable income at the time you make them because they’re typically made with pre-tax dollars. That means the money you deposit into your 401 (k) comes out of your gross pay, before taxes.
How does making pre-tax contributions to a 401k lower your current taxable income?
Your 401 (k) contributions directly reduce your taxable income at the time you make them because they’re typically made with pre-tax dollars. That means the money you deposit into your 401 (k) comes out of your gross pay, before taxes. As a result, you pay taxes on less income. 1