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.
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Have general questions about Social Security? Email them to SocialSecurity@fool.com, and they might be the subject of a future video!