Are 401(k) Contributions OASDI Taxable?

By: Ryan Cockerham | Reviewed by: Ashley Donohoe, MBA | Updated March 13, 2019

The old-age, survivors and disability insurance tax, also referred to as Social Security, is a powerful safety net that helps protect the welfare of individuals who do not receive income through regular employment for a variety of reasons.

As an adult approaches retirement age, platforms such as OASDI and 401(k) pension plans become increasingly relevant. Although it is possible to take advantage of a variety of tax exemptions when deferring parts of your income to a 401(k) plan, these exemptions do not extend to OASDI contribution requirements. Individuals who are actively planning their contribution budget should keep in mind that their Social Security contribution withholdings would not be affected by their 401(k) adjustments.

Tip

You are required to pay OASDI taxes on the sum total of your earned income prior to any 401(k) contributions.

OASDI Withholding Basics

When an employed individual receives a paycheck from their employer, 6.2 percent of the money they earn is routed out of their paycheck into Social Security, or OASDI. This specific percentage amount remains unchanged from 2018.

For self-employed individuals, the Social Security withholding is equivalent to 12.4 percent of their income. Although both of these percentages may seem to be a significant amount of a working adult's income, it is also important to remember that a cap does exist at which point OASDI contributions will no longer be taken.

For 2019, a maximum of $132,900 will be subjected to OASDI taxation. Income earned in excess of this amount can be collected without first deducting OASDI contributions, although standard state/federal income tax laws will still apply.

Using a 401(k) for Exemptions

When an employee contributes money to a 401(k) plan, these funds are deducted directly from their gross income prior to taxation. Simply put, this means that a 401(k) holder can reduce the amount of income they will be taxed on by contributing a portion of it to their pension plan. According to federal guidelines, 401(k) owners can contribute up to $19,000 of income annually to these funds. For many, the ability to reduce their taxable income by $19,000 will significantly reduce their year-end tax penalties.

It is important to note, however, that these limits do not take into account employer-matching contributions. According to recently updated federal guidelines, the new overall limit on contributions to "defined-contribution" plans, including 401(k)s, is $56,000.

Regardless of how much of your income finds its way into your 401(k), however, you will still be required to pay OASDI taxes on the full amount of income you earn. With that in mind, it is important for many adults to carefully budget how much they will contribute to their 401(k) and when, knowing that they will still be required to pay into Social Security with each of their paychecks.

Identifying Fund Contribution Deadlines

For some individuals, budgeting funds for retirement account contributions throughout the year may be somewhat difficult. The IRS allows taxpayers to contribute to 401(k) alternatives, such as IRAs, and receive the corresponding tax exemptions up to the filing deadline for that year's taxes. So, for example, you could contribute the maximum allowable amount of $6,000 to a Roth IRA on April 15, 2019 and have the tax benefits that come with this contribution applied to tax year 2018.

Although this specific method of budgeting may not be ideal for all individuals, it does provide a more flexible method of pension contribution and ensures that all adults have the opportunities they need to plan for a solid financial future.

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About the Author

Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.

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