Make the Most of Your Pretax Deductions

Don’t set it and forget it when it comes to pretax contributions. The money that comes out of your paycheck before taxes can work for you, but only if you manage it properly. Many employees mismanage or underutilize the pretax deduction programs that employers offer, says Joe Holberg, founder and CEO of Holberg Financial, so it’s important to learn as much as you can about your options. “The first major step is to know what is available to you. This is when you read the nitty-gritty paperwork, reach out to the HR person and figure out what portions of the pretax opportunities make sense for you.”

Follow this checklist to get the most out of your pretax deductions.


You can get a health savings account only if you have a high-deductible health plan — but once you open the account, it sticks with you even if you change jobs. HSAs are the best pretax deductions by far because they take the best aspects of a 401(k) and a Roth IRA, says Alvin Carlos, financial planner and managing partner at District Capital Management. “Your money grows tax-deferred, and tax-free if used for qualified medical expenses.”

Some HSA plans even allow you to invest in low-cost stock and bond mutual funds, all while lowering your tax bill. And finally, recent research found that even if your employer is matching your 401(k) contributions by 50 percent, you’re still better off contributing to your HSA account, Carlos says.

Keep an eye on your health costs throughout the year, Holberg says. Assess them quarterly and see if your withholdings are enough. If you find that your health care costs are going up, then consider increasing your HSA contribution.


If you have a low-deductible health insurance plan and aren’t eligible for an HSA, you should still contribute to a flexible spending account, Carlos says. “Contribute what you think you’ll spend on medical expenses toward a medical FSA, and put in your expected child care expenses toward a dependent care FSA.” Every little bit helps to lower your tax bill.


After maxing out your HSA, contribute the amount that maximizes your employer’s match to your 401(k), Carlos says.

When you get a raise, be sure to raise your pretax retirement deduction, says Jeff Jones, of Longview Financial Advisors. He says the automated contribution increase is his favorite 401(k) savings feature. “Not all employers offer the automated feature, so you may have to manually make the change, which takes a level of discipline,” he says. When review time rolls around and you get a raise, increase your employee deferred contribution by 1 or 2 percent, depending on the increase in income.

“Ideally, you would increase your contribution to account for the entire raise,” Jones says. “This significantly increases your savings potential while avoiding lifestyle creep, where raises are simply absorbed into your spending budget.”

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