Can You Deduct 401k Contributions From Your Taxes?

working from home

Taxes are something just about everybody must deal with throughout their adult lives. This is important because tax liabilities can affect your personal finances. Therefore, it is a good idea to do whatever you can to mitigate how much you are required to pay in taxes. Many people have wondered about whether or not you can deduct your contributions to your 401(k) plan on your tax returns.

What is a 401(k) plan?

A 401(k)-retirement plan is an employer-sponsored retirement account that has been named after the section of the Internal Revenue Code that brings this type of retirement account into existence. The law gives 401(k) account holders certain tax advantages.


The contributions you make to qualified retirement plans, such as a 401(k), are technically considered tax-deductible. However, there is nothing that you must do to claim the tax deductions for your contributions to your 401(k)-retirement account. Since your contributions to your traditional 401(k) account are made on a pre-tax basis you do not have to report them as deductions on your tax returns. Your employer has already lowered your taxable income by the amount contributed on your behalf and taken directly from your paycheck.

Limits on tax advantages

You should also realize that the tax advantages provided by a 401(k) account do have limits. There is a limit to how much of your income you are allowed to contribute. The annual limit is $20,500 for 2022. However, those who are 50 years of age or older are allowed to contribute an extra $6,500 each year.

Also, you will eventually be taxed on the money in your traditional 401(k) account when you finally distribute the funds. The withdrawals will be included in your overall taxable income for the year that you make the withdrawl. The idea is that by the time you withdraw funds during retirement you will be in a lower income tax bracket since you will not be working to earn income. Therefore, the funds distributed from the traditional 401(k) account will be taxed at a lower rate.

Roth 401(k)

Although your contributions are deducted automatically from your taxes with a traditional 401(k), a Roth 401(k) does not provide you with this same tax benefit. Many people end up choosing to contribute to a Roth 401(k) because they have already contributed the maximum amount allowed to their traditional 401(k).

With a Roth 401(k), contributions are made with post-tax income which means that they will not lower your taxable income that is reported on your tax return. On the other hand, you do now have to declare distributions from a Roth 401(k) as income when you eventually withdraw during retirement.

Tax planning strategy

If you use the traditional 401(k) and Roth 401(k) accounts correctly you may save yourself significantly on tax liabilities. However, there are many other ways you can minimize your tax bill. Having a comprehensive tax planning strategy can make the most out of your money and ensure you are financially secure during retirement while also leaving something for your intended heirs.

Roth 401(k) plans are long term retirement savings vehicles. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72 (70 1⁄2 if you reach 70 1⁄2 before January 1, 2020). Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Any opinions are those of the author and not necessarily Raymond James. Any information provided is for informational purposes only and does not constitute a recommendation.