While flowers are starting to bloom in many places across the country, a different season is coming to a close – tax season. Tax season is the annual period when we traverse the intricate landscape of tax filings and have to gather financial documents, assess deductions, and complete the necessary paperwork to fulfill our civic responsibilities.
While we are all subject to the same tax laws, taxes impact each of us in unique ways. Factors that impact individuals’ tax burdens include residency, income bracket, and deductions or write-offs (e.g.: interest payments, charitable contributions, and more). However, one thing that is consistent for all of us is that deferring wages into tax-advantaged employer benefits plan can assist us in reaching certain goals while also reducing the amount of taxable income we receive annually.
Tax-advantaged workplace benefits are common in many employers’ total rewards packages. These benefits allow you to allocate money for various purposes including retirement savings and healthcare expenses. Some common tax-advantaged employer benefits are listed below:
| Common Tax-Advantaged Employer Benefits | |||
| Type of Plan/Account | 2024 Individual Limit | Benefit | Tax Treatment |
| Health Savings Account | $4,150 | Savings account designed for medical expenses for those with a high deductible health plan | Tax-Free |
| Flexible Spending Account | $3,200 | Account for medical expenses not covered by other health plans | Tax-Free |
|
401(k) Plan |
$23,000 or $30,500 for those age 50 or older |
Employer-sponsored retirement account | Tax-Deferred (or for Roth feature, after-tax contributions, tax-free distributions) |
| Nonqualified Deferred Compensation Plan | No statutory limit; some plans may establish limits | Employer-sponsored investment account for retirement or in-service distributions for highly compensated employees | Tax-Deferred |
Not only does participating in a tax-advantaged benefit plan or account allow you to set aside assets for specific reasons, but these plans also allow you to save money because the dollars allocated to these plans would have otherwise been subject to income taxes. In other words, the dollars in your tax-advantaged benefits would have been subject to annual income tax if you received them via your paycheck.
As seen in the chart, Health Savings Accounts and Flexible Spending Accounts are not subject to tax at all. These accounts come with the caveat that the monies deferred into them are spent in a certain amount of time and for qualifying medical expenses. Conversely, nonqualified deferred compensation plans (NQDCP) and 401(k) plans are tax-deferred, meaning that they will be subject to ordinary income tax upon when the account owner collects a distribution from the account. By deferring into these plans, employees are saving and investing the taxes they would otherwise pay – and in some cases, the remaining taxable income may be subject to a lower marginal tax bracket. Additionally, individuals who have NQDCPs and 401(k) plans may be in a lower tax bracket if they wait to collect distributions in retirement, as opposed to the tax bracket they may be in while they were working, which increases their tax savings. Further, deferrals into NQDCPs and 401(k) plans may benefit from the compounding interest while invested; any investment gains earned in a NQDCP or 401(k) are not subject to capital gains taxes but are subject to the ordinary income tax upon distribution.
While taxes play an important role in our communities, it may make sense for prudent retirement savers and fiscally conscious employees to reduce their tax burdens whenever possible. Individuals have options when addressing their particular tax situations, and you may want to consider how your options, like a NQDCP, can help you manage your tax burden. To learn more, please visit KBAdmin.com.
Karr Barth Administrators, Inc. does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.