The contributions you make to your 401(k) plan can reduce your tax liability at the end of the year as well as your tax withholding each pay period. However, you don’t actually take a tax deduction on your income tax return for your 401(k) plan contributions. This is because you receive the benefit of a tax deduction every time you make a contribution with pre-tax dollars.
Table of Contents
Contributions to Your 401(k)Increase in Your Take-Home PayThe Saver's Tax CreditMisconceptions About 401(k) Contributions
Contributions to Your 401(k)
The 401(k) plan contributions you elect to make come directly out of your salary. Since the contributions are made with pre-tax dollars, your employer does not include these amounts in your taxable income for the year. At the end of the year, when you receive your W-2 form that shows your earnings, you will notice that your wages subject to federal income tax are lower because of your 401(k) plan contributions.
Since the wages are not counted in your taxable income to begin with, you do not take a deduction when you file your return. However, 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 amount would be taxed in the 24 percent bracket if it were included in taxable income, then your tax savings is $1,920.
Increase in Your Take-Home Pay
Your 401(k) plan contributions also reduce the amount of your income tax withholding. Each time you get paid, your employer withholds money for your federal income taxes based on your expected taxable income.
However, if you make 401(k) plan contributions, the amount of money subject to withholding will decrease since your taxable income is less than your actual salary. The result is more money in your pocket each pay period.
The Saver’s Tax Credit
In addition to the tax savings available for your contributions to a 401(k), the IRS also offers the Saver’s Credit if your Adjusted Gross Income (AGI) doesn’t exceed certain maximums. This credit offers a dollar-for-dollar reduction of your income tax bill. In 2023, single taxpayers whose AGI did not exceed $$21,750 for 2023 could receive a credit up to $1,000, and married taxpayers filing jointly with an AGI of $$43,500 for 2023 or less could receive up to $2,000.
If your AGI does not exceed IRS income thresholds, you are at least 18 years of age, you are not a full-time student, and you are not a dependent of another taxpayer, then you can decrease your tax liability with the Saver’s Credit. TurboTax also automatically gives you the Saver’s Credit if you are eligible based on your entries regarding your retirement contributions.
Misconceptions About 401(k) Contributions
The contributions that you make to a 401(k) plan only reduce your income taxes, not your Social Security and Medicare taxes. These two taxes only apply to your earned income, but you do not get to claim any deductions before these taxes are assessed. For example, if your gross wages for the month are $2,500 and you contribute $400 to your 401(k) plan from it, there is withholding on the full $2,500 for Social Security and Medicare even though for federal income tax purposes, there is withholding on $2,100.
As you file your 2023 taxes, remember you can still contribute up to $6,500 ($7,500 if you are 50 and older) to your IRA by the tax deadline, and you may be able to get a tax deduction on your 2023 taxes. Just remember to tell your retirement account administrator that your contribution is for 2023 and not 2024.
Don’t worry about knowing these tax rules. No matter what moves you made last year, TurboTax will make them count on your taxes. 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
Since the contributions are made with pre-tax dollars, your employer does not include these amounts in your taxable income for the year. At the end of the year, when you receive your. Since the wages are not counted in your taxable income to begin with, you do not take a deduction when you file your return.
Can you deduct 401k contributions from your taxes? ›
Unless you're a business owner, you won't claim your 401(k) contributions as tax deductible when you fill out your Form 1040. Instead, the money is taken out of your paycheck before federal taxes on your income are figured.
How do I claim my 401k on TurboTax? ›
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.
What is the penalty for withdrawing 401k from TurboTax? ›
If you received and entered a 2022 Form 1009-R for a retirement distribution and are under 59 ½ then you will have to pay a 10% early withdrawal penalty unless you meet an exception. If you rolled over the funds within 60 days into a similar retirement account then you can indicate this in the follow-up questions.
Where do I put my 401k on my taxes? ›
If you have a 401(k) or TSP through your employer, your contribution is reported in Box 12 of your W-2 with the letter code D. Because your contribution is included in your W-2, do not re-enter it in the retirement section.
Can you take money out of your 401k for taxes? ›
Generally, anyone can make an early withdrawal from 401(k) plans at any time and for any reason. However, these distributions typically count as taxable income. If you're under the age of 59½, you typically have to pay a 10% penalty on the amount withdrawn.
Can you deduct 401k losses on taxes? ›
So, if you're trying to claim a loss on your 401(k), you must close all your 401(k)s. Then, total your nondeductible contributions and the current value of the accounts, and you can write off the difference if the current value of the accounts is lower.
Does TurboTax automatically deduct 401k contributions? ›
Contributions to Your 401(k)
Since the wages are not counted in your taxable income to begin with, you do not take a deduction when you file your return. However, when you prepare your tax return, it's possible to calculate how much income tax your 401(k) contributions saved you.
Does a 401k reduce taxable income? ›
Money pulled from your take-home pay and put into a 401(k) lowers your taxable income so you pay less income tax now. For example, let's assume your salary is $35,000 and your tax bracket is 25%. When you contribute 6% of your salary into a tax-deferred 401(k)— $2,100—your taxable income is reduced to $32,900.
Does a 401k count as income? ›
Withdrawals from 401(k)s are considered income and are generally subject to income taxes because contributions and gains were tax-deferred, rather than tax-free. Still, by knowing the rules and applying withdrawal strategies, you can access your savings without fear.
Do You Have to Pay Taxes After Age 65 (or 59 ½)? Your age can affect how much you pay in taxes. Again, the early withdrawal penalty usually applies to those under the age of 59 ½. After that age, you still have to pay federal income tax on withdrawals in most cases, but the penalty goes away.
How do I avoid 20% tax on my 401k withdrawal? ›
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
How does Turbotax handle excess 401k contributions? ›
You must include the excess deferral in your wages in the year the excess deferral happened. On the "Any Other Earned Income" screen enter "2023 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".
Where do I put my 401K on TurboTax? ›
Where do I enter my contribution to my 401(k)? You don't enter your 401K contributions anywhere on your tax return. All you have to do is report W-2 data in Turbo Tax exactly as it appears on the form. The 401(k) plan contributions you elect to make come directly out of your salary.
Do you get a tax deduction for a 401K? ›
While 401(k) contributions are not technically tax deductible, these retirement accounts offer significant tax benefits. Contributing pretax into a traditional 401(k) lets you lower your taxable income and defer taxes on your retirement savings until you withdraw it.
How do I report a 401K withdrawal on my tax return? ›
Once you start withdrawing from your traditional 401(k), your withdrawals are usually taxed as ordinary taxable income. That said, you'll report the taxable part of your distribution directly on your Form 1040 for any tax year that you make a distribution.
Does contributing more to a 401k reduce taxes? ›
Contribute as much as you can to your retirement plan
Your employer may offer a 401(k), 403(b) or other retirement savings plan. Contributions to these plans may be made pretax, which means they will reduce the amount of your income that is subject to tax for this year.
Are donations from a 401k tax-deductible? ›
It is always possible to donate retirement assets, including IRAs, 401(k)s and 403(b)s,1 by cashing them out, paying the income tax attributable to the distribution and then contributing the proceeds to charity. In many cases, though, there is little to no tax benefit associated with this type of donation.
Are 401k contributions excluded from taxable income? ›
Contributions to a traditional 401(k) are made with pre-tax dollars—meaning the money goes into your retirement account before it gets taxed. With pre-tax contributions, every dollar you save will reduce your current taxable income by an equal amount, which means you'll owe less in income taxes for the year.
What retirement contributions are tax-deductible? ›
Traditional IRA
Deductions vary according to your modified adjusted gross income (MAGI) and whether or not you're covered by a retirement plan at work. If you (and your spouse, if applicable) aren't covered by an employer retirement plan, your traditional IRA contributions are fully tax-deductible.
