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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. Therefore, many people have wondered whether or not contributions to a 401(k) plan can be deducted on tax returns. 

What is a 401(k) plan? 

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

Tax deductible 

The contributions you make to qualified retirement plans, such as a 401(k), are technically considered tax deductible. However, there is nothing you have to do to claim the tax deductions for contributions to a 401(k) retirement account. Since contributions to a 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 the taxable income by the amount contributed and taken directly from your paycheck. 

Limits on tax advantages

You should also realize the tax advantages provided by a 401(k) account do have limits. There is a limit on how much of your income you are allowed to contribute to a 401(k). 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 start withdrawing the funds. These withdrawals will be included in the overall taxable income for the year. It is possible by the time you withdraw funds during retirement, you may be in a lower income tax bracket since you may 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 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. With a Roth, 401(k) contributions are made with post-tax income which means they will not lower the taxable income required to be reported on your tax return. On the other hand, distributions from a Roth 401(k) are not taxed 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 may make the most out of your money and can help ensure you are financially independent during retirement while also leaving something for your intended heirs. Contact us to help make sense of it all.


This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investments mentioned may not be suitable for all investors. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. 

401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. 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 ½ if you reach 70 ½ before January 1, 2020).