Tax Tips 401(k) Plans Read the Article Open Share Drawer Share this:Click to share on Facebook (Opens in new window)Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Pinterest (Opens in new window)Click to print (Opens in new window) Written by TurboTaxBlogTeam Published Jan 25, 2007 1 min read A 401(k) plan is an employer-sponsored retirement plan that allows you to save for your retirement and get a tax deduction at the same time. You have money withheld from your paycheck, and that money is deposited into your 401(k) account. You receive a deduction on your income tax return because this contribution is not included in your wages in box 1 of your Form W-2. You pay income tax on the amount shown in box 1 on your Form W-2. Since the contribution to the 401(k) is not included in the box 1 amount, you do not pay tax on it. Your contribution is tax deferred. The amount you contribute to your 401(k) plan is shown in box 12 of your Form W-2 with a code “D”. You only need to enter your W-2 showing box 12 into TurboTax. You do not need to enter your 401(k) contribution anywhere else in TurboTax. There is a limit on the amount you can contribute. For 2006 the maximum amount you can contribute is $15,000 ($20,000 if age 50 or older). For 2007 the maximum amount is $15,500 ($20,500 if age 50 or older). Your 401(k) can grow on a tax deferred basis. That is, you do not pay any income tax on the earnings that are in the 401(k) plan. Your employer may also make matching contributions for you. These matching contributions are also tax deferred. However, you do not avoid taxes altogether. Notice that the 401(k) plan is a tax deferred, not a tax free arrangement. When you retire and receive a distribution from your 401(k) plan, the entire amount of your distribution will generally be taxable to you. This includes your contribution, any earnings, and any employer matching contributions. Previous Post Common Tax Mistakes, Not updating your Form W-4 Next Post 1098 vs 1099 forms Explained (Difference Between These Tax Forms) Written by TurboTaxBlogTeam More from TurboTaxBlogTeam Leave a ReplyCancel reply Browse Related Articles Uncategorized What Is Deferred Compensation & How Is It Taxed? Investments How Does an Inherited IRA Work? Work Choosing Your Business Structure: 5 Types of Businesses… Tax Deductions and Credits Are HOA Fees Tax Deductible? What You Need to Know Crypto Understanding Crypto and Capital Gains Work 7 Things You Need to Know About the New Business Report… Work Using Form 8829 to Write-Off Business Use of Your Home Tax Tips Roth 403(b) vs. Roth IRA: Which Should You Invest In? Life Interest Rates, Inflation, and Your Taxes Investments Essential Tax Tips for Maximizing Investment Gains