Can You Deduct 401(k) Contributions from Your Taxes?

Tax advantages are always a key element of 401(k) plans—they go hand in hand with the benefits. 

But do you need to deduct your 401(k) plan contributions when you file your tax return? In short, the answer is no. The tax savings happen automatically when your contributions go into your 401(k) account. Here’s how it works.

Are 401(k) contributions tax deductible?

If you’re an employee, you don’t need to deduct 401(k) contributions because the money is automatically taken from your paycheck before taxes. As a result, the tax benefit comes from reducing your taxable income. If you were to deduct the contributions when you file your taxes, it would result in double tax benefits—which the IRS doesn’t permit. The 401(k) contributions themselves are reported on your W-2 in box 12 with code D. Any contributions your employer makes on your behalf, such as a matching contribution, are not taxable to the employee.

The situation is different if you’re an employer offering a 401(k) match. Contributions you make on behalf of your employees are tax deductible, subject to certain limits. And if you’re self-employed and have a solo 401(k), you may be eligible to deduct the contributions you make for yourself.

How 401(k) contributions impact your taxable income

With traditional 401(k) plans, contributions are deducted directly from your paychecks before taxes. This will be reflected on your W-2 form,showing lower taxable wages due to your 401(k) plan contributions. 

When you prepare your tax return, it’s possible to calculate how much income tax your 401(k) contributions saved you. For example, if you contribute $8,000 to your 401(k) during the year and that income would’ve been subject to a 24% tax rate, then your tax savings would be $1,920.

Contributions to a Roth 401(k) are made with post-tax dollars, meaning they don’t reduce your taxable income and aren’t deductible. Instead, you’ll reap the benefits in retirement with tax-free qualified withdrawals.

The Saver’s Tax Credit

401(k) contributions are eligible contributions for the Low-Income Retirement Plan Contribution Credit, also known as the Saver’s Credit. Available to low- and moderate-income taxpayers, it helps offset a portion of the first $2,000 you make in voluntary retirement contributions ($4,000 for married couples).

For the 2024 tax year, the credit went up to $1,000 ($2,000 for married couples). The credit begins phasing out at incomes greater than $23,000 for single filers, $34,500 for head of household, and $46,000 for married filing jointly. The credit phases out completely for the following income limits:

• Single: $38,250
• Married filing separately: $38,250
• Head of household: $57,375
• Married filing jointly: $76,500

Tip: TurboTax automatically gets you the Saver’s Credit if you’re eligible based on your retirement contribution entries.

How withdrawing from your 401(k) impacts your taxes

Withdrawing money from a 401(k) can trigger taxes, but the impact varies based on factors such as the type of plan and timing of the withdrawal.

Traditional 401(k) withdrawals

With a traditional 401(k), you contribute pre-tax dollars and pay taxes on qualified withdrawals at your ordinary income tax rate. To qualify, you must take your withdrawal after you turn 59½ or meet an exception, such as a disability or financial hardship. Nonqualified withdrawals are subject to income taxes plus an additional 10% tax penalty.

Traditional 401(k) plans are subject to required minimum distributions (RMDs). That means you must begin withdrawing funds by April 1 of the year following your retirement or when you turn 73 years old, whichever comes later. Failing to take the required amount results in a 25% excise tax on the amount you didn’t withdraw.

Roth 401(k) withdrawals

Roth 401(k) withdrawals work differently. Qualified withdrawals are tax-free and aren’t subject to RMDs during the account holder’s life. To be considered qualified, a withdrawal must be taken at least five years after opening the account and after you turn 59½ years old. Distributions taken earlier generally aren’t “qualified” and must be included in your gross taxable income for the year.

How to maximize your tax benefits through 401(k) contributions

To maximize the tax benefits you receive through your retirement contributions, keep these tips in mind:

• Take advantage of the Saver’s Credit: If you meet the income eligibility requirements, contributing to a 401(k) can qualify you for the Saver’s Credit and its tax credit of up to $1,000 ($2,000 for married couples). We covered this earlier, but it’s worth repeating because it’s one of the few ways to double up on tax benefits.
• Maximize employer matching: When possible, contribute at least enough to receive your employer’s full match. Employer contributions are essentially free money and are not taxable to the recipient. 
• Contribute up to the IRS limit: Consider maxing out your 401(k) contributions to take full advantage of the tax benefits while growing your nest egg. The 401(k) contribution limit for the 2024 tax year is $23,000 per individual. That goes up to $23,500 for 2025.
• Use catch-up contributions: If you’re 50 or older, you can take advantage of an additional catch-up contribution allowance.
• Strategically split contributions: Consider contributing to both traditional and Roth 401(k) plans to balance tax benefits now and in retirement.
• Consider other retirement accounts: In addition to your 401(k), an IRA (traditional or Roth) can provide further tax advantages and diversification in retirement savings. Plus, you can contribute up to $7,000 ($8,000 if you are 50 and older) to your IRA by the 2025 tax deadline and may be able to get a tax deduction on your 2024 taxes.

Optimize your 401(k) contributions for maximum savings

A traditional 401(k) plan helps lower your taxable income now while helping you build your retirement savings. A Roth 401(k) plan works differently. It won’t lower your taxes now but earnings and withdrawals made during retirement are tax free.

The right setup for you will depend on your goals, tax rate trajectory, and preferences. Whatever your situation, maximizing your contributions and employer matching now can make a big difference in the long run.

Need help with 401(k) tax reporting and compliance this year? TurboTax has you covered. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund—guaranteed.

FAQs

Does contributing to a 401(k) reduce taxable income?

Yes, the amount you contribute to a traditional 401(k) plan is automatically deducted from your taxable income for the year, reducing your current tax liability. However, you’ll pay taxes on these funds when you withdraw them during retirement.

Do you get a tax credit for contributing to a 401(k)?

It’s possible to get a tax credit for contributing to a 401(k) plan if you meet certain income requirements. The Saver’s Credit of $1,000 ($2,000 for married couples) is currently available for low- to moderate-income taxpayers who contribute to retirement plans, including 401(k) plans.

Are IRA contributions tax deductible if you have a 401(k)?

Contributions to a traditional IRA may still be deductible even if you participate in a 401(k) at work. However, the deduction gradually phases out as your income increases. For example, if you’re single and don’t have a retirement plan at work, the deduction is allowed in full. But if you have a 401(k) plan, you could only take a full deduction if your modified adjusted gross income (MAGI) was $77,000 or less in 2024.

Are solo 401(k) contributions tax deductible?

If you’re self-employed, pre-tax contributions to a traditional solo 401(k) plan can be tax deductible. You must have self-employment income to qualify. Self-employment income consists of net profits from Schedule C or Schedule F. The IRS provides a rate worksheet to help you determine the deduction amount you can take.