There are many reasons to contribute to a workplace-sponsored retirement account, such as a 401(k), 403(b) or 457 plan: They’re easy to enroll in, deductions get taken straight from your paycheck, and many employers even offer a “matching contribution,” which is like getting free money. But the biggest advantage of contributing to a 401(k) or other workplace-sponsored retirement plan may well be the tax benefits you receive, as they could add up to savings of tens of thousands of dollars—or more—over the course of your career.
Are 401(k) contributions deductible?
People get confused thinking that 401(k) contributions are tax-deductible: That’s not quite right. You can’t “write off” your retirement contributions, or list them as ite
+mized deductions on your federal income tax returns. Instead, they serve as a way to lower your taxable income, which means you’ll owe less taxes to Uncle Sam in your pre-retirement years.
Westend61; Getty Images
How do 401(k) contributions lower your taxes?
Contributing to a 401(k) or another workplace-sponsored retirement plan reduces your taxable income—and the more you make, the more you can save.
Here’s an example: Say you made $50,000 per year and your tax filing status is single. This puts you in the 22% tax bracket. If you contributed 10% of your paychecks to a 401(k) retirement plan, which is $5,000, you could save $1,100 in taxes.
But if you made $100,000 per year and are filing single, you are in the 24% tax bracket. Even if you contributed the same amount—$5,000—your tax savings would be greater: $5,000 x 24% = $1,200
Of course, this example is for illustrative purposes, as your taxable income is based on your actual adjusted gross income, which will vary based on other tax credits and deductions you are claiming. But the point is clear: Contributing to a retirement savings plan not only sets you up for a secure future—it also helps to lower your tax bill while you’re still working.
Another benefit to making retirement contributions is that by adding more money to your accounts at a young age, you will have more time to enjoy the miracle of compounded interest, which is what you earn on your original contributions plus the interest you’ve already accumulated. This is how your retirement savings can grow to a point where it can sustain you for years after you stop working.
Related: What is the standard deduction for 2023 and 2024? Has it increased?
What are this year’s 401(k) contribution limits & catch up limits?
Now, you’re probably wondering, what is the maximum amount you can contribute to your retirement plan—and thus save in taxes?
According to the IRS, the 2024 limit for employee contribution to 401(k), 403(b) plans, most 457 plans and the Thrift Savings Plan, is $23,000, a $500 increase over last year.
The “catch up” contribution for workers aged 50 and up is $7,500.
In addition, there is a limit to the additional contributions your employer made for you, such as profit-sharing contributions: In 2024, the combined contributions made by you and your employer cannot exceed $69,000.
Finally, in order to receive the tax benefit, your retirement plan contributions must be made in the same calendar year you are filing your taxes, so you will need to make them by your December 31 payroll.
When do you pay taxes on your 401(k) income?
You’ll get taxed eventually when you withdraw your money from your 401(k), and unless your withdrawals are rolled over into an IRA or another qualified plan, this money will be taxed as regular income.
The IRS states that you can start taking withdrawals without incurring a penalty as early as age 59 ½, but you must start taking these withdrawals when you turn 72: These are known as required minimum distributions (RMDs).
However, even if you’re still working in your 60s or 70s, odds are you won’t be putting in as many hours as you are today, and so your income will be less, and, thus, you’ll be in a lower tax bracket. This means that your tax bill will be lower when you retire than if you paid taxes on those savings today, which is why so many people choose to go the tax deferred route.
Do IRA contributions lower your taxes?
Traditional IRA contributions can also lower your taxable income. In 2024, the IRS raised the limits to IRA deductions by $500 to $7,000, but it’s important to keep in mind that the IRS says that if you or your spouse is already covered by a workplace retirement plan, your IRA deduction may be “phased out” or reduced. IRA deductions may also be “phased out” according to your income:
IRA contribution phase-out ranges
| Filing status | Phase-out range |
|---|---|
Single |
$77,000–$83,000 |
Married Filing Jointly |
$123,000–$143,000 |
Married Filing Separately |
$0–$10,000 |
In addition, if only one spouse is covered by a workplace retirement plan, the phase-out range increases to between $230,000–$240,000.
Do Roth 401(k) contributions lower your taxable income?
No. A Roth 401(k) is another type of employer-sponsored retirement account. It is configured in the opposite way as a 401(k): These contributions are taxed immediately, making your withdrawals upon retirement completely tax-free.
When opening your retirement accounts, you should spend time imagining what your life will be like in the decades going forward; that way, you can decide whether you’ll have a higher income (and thus be in a higher tax bracket) during your golden years, or if you’ll be in a lower tax bracket in your retirement, and therefore wish to pay taxes at a lower rate.
Is there a tax credit for retirement contributions?
There is. Formerly known as the Retirement Plan Contribution, the Saver’s Credit gives a tax break to low and middle-income workers who are stashing away cash for retirement. Eligible accounts include 401(k), 403(b), 457 plans, Tradition IRAs, Roth IRAs, Simple IRAs and SEP-IRAs.
The credit value depends on the amount of retirement plan contributions you’ve made over the course of the year—and is worth either 50%, 20%, or 10% of your qualified retirement contributions, for a total of $1,000 for single filers and $2,000 for married taxpayers filing jointly.
Savers Credit Limits for the 2023 Tax Year
| Tax Credit | Single Filers | Married Filing Separately | Head of Household | Joint Filers |
|---|---|---|---|---|
50% of Contribution |
$21,750 or less |
$21,750 or less |
$32,625 or less |
$43,500 or less |
20% of Contribution |
$21,751–$23,750 |
$21,751–$23,750 |
$32,626–$35,625 |
$43,501–$47,500 |
10% of Contribution |
$23,751–$36,500 |
$23,751–$36,500 |
$35,626–$54,750 |
$47,501–$73,000 |
To claim the Saver’s Credit, fill out tax form 8880.
