[WCCS]

It is my understanding that 401K contibutions are deducted from the employee wages exempt of Federal Taxes and CA Income tax but, I need to know if Social Security is withheld from the amount contributed?

[ebaines]

The 401(k) contribution amount is subject to both SS and medicare tax. The good news is that later when you take distributions from your 401(k) the proceeds are not subject to either SS or medicare tax. Also just to be clear, although you said that the amount of contribution is "exempt" from federal or CA income taxes, in reality they are not exempt but rather are tax-deferred; sooner or later you will pay income taxes on the amount contributed to your 401(k).

[WCCS]

The 401(k) contribution amount is subject to both SS and medicare tax. The good news is that later when you take distributions from your 401(k) the proceeds are not subject to either SS or medicare tax. Also just to be clear, although you said that the amount of contribution is "exempt" from federal or CA income taxes, in reality they are not exempt but rather are tax-deferred; sooner or later you will pay income taxes on the amount contributed to your 401(k).

Thank you for the clarification.

[The Junoo]

401k contributions are not taxed. Earnings are not taxed yearly as they acrue. You are taxed on the amount of your withdrawals at retirement. The assumption is that at retirement, your tax rate will be lower than during your employment years. One of the attractive features of a 401k is its affect on your tax burden. You will have a lower tax bill if you contribute a portion of your earnings to a 401k than if you had kept all your wages to spend or put in a bank. The catch is that you will have to pay taxes on your contributions one day. That day will come whenever you withdraw the MONEY.so, Contributions to a 401k reduce your tax bill by reducing your taxable income. 401k contributions take place on a pretax basis. Assume that you make $1k a week and elect to contribute 6 percent of your earnings to your 401k. That 6 percent, or $60, comes out of your earnings before the IRS figures your taxable income. You will owe taxes on only $940 of your earnings that week, rather than $1K. Extrapolating to a full year, your gross income would be $52K, but you would owe taxes on $48,800. You do not get out of paying taxes altogether on 401k contributions. Instead, you defer paying taxes on the contributions until later in life. You owe taxes on 401k withdrawals at a rate determined by your income tax bracket. If you have not yet turned 59 1/2, you also owe a 10-percent penalty on the amount of the distribution. You can get out of the early-withdrawal penalty under a few circumstances, such as for withdrawals you make because of a disability or to pay significant medical expenses or etc.