Is a 401(k) Exempt from FICA?

Contributing to your 401(k) won't reduce your FICA taxes.

Contributing to your 401(k) won't reduce your FICA taxes.

The Federal Insurance Contribution Act, or FICA, taxes -- Social Security and Medicare taxes -- apply to most of your earned income, like your wages or salary. Though contributions to your 401(k) plan are excluded from your income tax, the money you stash in your retirement plan isn't exempt from FICA taxes.

401(k) Contributions

Your employer is responsible for withholding FICA taxes on the money you contribute to your 401(k) plan. As of 2013, the FICA tax rates are 6.2 percent on the first $113,700 of your wages for Social Security tax and and 1.45 percent on all of wages for Medicare tax. If you put $1,000 into your 401(k) plan in 2013, you pay federal income tax on $1,000 less income, but you're still on the hook for $76.50 in FICA taxes, or 7.65 percent of $1,000.

Tax Reporting

You don't need to worry about reporting your 401(k) contributions on your income tax form, because it's already taken care of on your W-2. On the form, Box 1 has your taxable income (which doesn't include your 401(k) contributions), which you simply transfer to tax return. Box 3 and Box 5, which contain the amount of wages subject to FICA taxes, are different from the amount in Box 1 and do include your 401(k) contributions, so the appropriate FICA taxes have already been withheld.

401(k) Gains

Any capital gains that take place within the 401(k) plan aren't subject to FICA taxes because the growth isn't wage income. Gains inside your 401(k) plan are exempt from income taxes as long as the money remains in your account, because it's tax-sheltered. Your investments in your 401(k) grow faster than in a regular account because none of your earnings get shared with Uncle Sam.

401(k) Distributions

When you take distributions from your 401(k) plan, your withdrawals won't be hit with FICA taxes, because you already paid them when the money went into the account. The distributions are taxed as ordinary income, but since it's treated as a pension distribution, it's not "earned income," so Social Security and Medicare taxes don't apply. If you take out $5,000 and you're in the 25 percent tax bracket, you end up owing $1,250 of ordinary income taxes, but you won't owe any FICA taxes.


About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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