Tax Savings

• Participating in your company's 401k program is one of the best ways to save money on taxes, but it is important to understand which taxes are, and are not, impacted by your contributions. When you dedicate part of your paycheck to the 401k plan, that money is deducted from your federal taxable income. That contribution has no impact, however, on the wages you are taxed on for FICA purposes.
  
  

W-2 Form

• You can see the impact of your 401k contribution when you receive your W-2 form at the beginning of the year. The W-2 form lists your federal taxable wages, as well as your taxable wages for FICA, Medicare and for your state. When you receive your W-2, you can clearly see that the amount of your 401k contribution was deducted from your federal taxable wages, but not your FICA, Medicare or state income.
  
  

FICA Taxes

• While the money you put into a 401k does lower your overall tax bill, it has no impact on your FICA taxes. The money you invest in your 401k is deducted from your taxable wages when computing your federal income tax, but not your FICA taxes. That means if you make $40,000 a year and contribute 25 percent of your income to a 401k, your federal taxable wages are $30,000, but your FICA taxable wages are $40,000.
  
  

Taxes in Retirement

• Since FICA is strictly a payroll tax, you do not have to pay that tax on the money you withdraw from your 401k in retirement. When you take money out of your 401k to meet your living expenses in retirement, that money is considered income, and you must pay federal income taxes on the funds at your normal income tax rate. But since it is considered unearned income, you do not have to pay FICA taxes on the money.