pre-tax contribution investment & finance definition

Money that is subtracted from an employee’s gross pay before taxes have been deducted. Pre-tax contributions are often used to fund 401(k) retirement savings plans and Flexible Spending Accounts (FSAs), which can be used to pay for day care expenses or unreimbursed health care expenses.

The benefit of a pre-tax contribution plan is that the entire $1 of salary can be applied to the 401(k) retirement account or Flexible Spending Account. In contrast, employees don’t receive their full $1 of salary in their paycheck. Instead, taxes have been deducted; someone in the 25 percent tax bracket will receive only 75 cents of the dollar that he or she earned.