Your Social Security benefits are based on how much you earn. But if you voluntarily make contributions to a 401(k) plan to reduce your taxable income, are you shooting yourself in the foot for Social Security?
In the following video from our Social Security Q&A series, Dan Caplinger, The Motley Fool's director of investment planning, answers a question from Fool reader Loni, who asks whether making 401(k) contributions actually reduces Social Security benefits by cutting your taxable income. Dan reassures her that the answer is no, because Social Security benefits are based on the amount of earnings that are subject to Social Security tax. While 401(k) contributions don't get taxed for federal income tax purposes, you still pay Social Security taxes on the amount you contribute. Therefore, your benefits are still based on your full earnings amount, and saving in a 401(k) gives you both Social Security benefits and another source of income in retirement.
Have general questions about Social Security? Email them to [email protected], and they might be the subject of a future video!
Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.