Benefits 101: How to Explain "Tax-Advantaged" to Your Employees

In the world of benefits the term “tax-advantaged” is used frequently, but very rarely defined. After all, the term seems relatively self-explanatory — yet few know how or why the term can directly impact their personal finances. Read on for a primer on how to explain the term tax-advantaged to your employees and why making tax-advantaged decisions can lead to significant cost savings. 

What does “tax-advantaged” mean?

The term tax-advantaged, at its most basic, means that something is either exempt from taxation, offers tax-related benefits, or is tax-deferred (i.e. allows interest to accumulate tax-free until collection).Generally, “tax-advantaged” can be used to describe things like savings plans, financial accounts, investments, and even certain incentive programs.

Understanding the difference between different tax-advantaged accounts is also critically important. Take, for instance, a TraditionalIRA vs. a Roth IRA. Both are individual retirement accounts, and both are tax-advantaged. However, there are some key differences:

Traditional IRA: You don’t pay taxes on the money you deposit, which grows tax-deferred, but your withdrawals are subject to income tax‍

Roth IRA: The money you put in has already been taxed, but your money grows tax-free, as are your subsequent withdrawals

As you can see, both accounts are tax-advantaged, but depending on your tax-bracket and your future earning potential, one option may be much better for you than the other.

Why are tax-advantaged accounts beneficial?

Paying taxes is inevitable, but tax advantaged accounts enable you to be more strategic about when payment is made in order to maximize your earning potential. Put simply, they can save you money. And some tax advantaged benefits, like the Dependent Care FSA or Healthcare HSA enable you to set aside a fixed amount of pre-tax dollars for qualifying child care and health expenses. 

What kinds of accounts are tax-advantaged?

As we mentioned above, both Roth IRAs and Traditional IRAs are famously tax-advantaged. Some other well-known tax-advantaged programs include:

• Health savings accounts (HSA)
• Flexible spending accounts (FSA)
• Dependent care FSA
• Commuter benefits
• Employer-sponsored 401(k)
• Individual 401(k)
• 529 college/education savings accounts

This is by no means an exhaustive list. There are an array of tax-advantaged accounts and plans that meet very specific needs, depending on your life stage and investment interest level. Outside of the accounts offered by your employer, you can find other options through online research or by speaking with your accountant/financial planner.  

Tax-advantaged programs are a win-win

In fact, tax-advantaged benefits offered through an employer often benefit both the employer and the employee.

Let’s take Flexible Spending Accounts, for example. Flexible spending accounts are tax-advantaged for employees in that the money put into the account is taken out of their paycheck pre-payroll tax. By reducing their taxable income, employees can hypothetically increase their take-home pay. Employers, on the other hand, can reduce the amount of Social Security, Medicare, and other payroll tax they’re expected to pay, since they don’t pay tax on the employee's FSA contributions. 

Have any questions about demystifying the world of benefits, for yourself or your employees? Feel free to reach out to us at sales@getbenepass.com.