Are 401(k) Contributions Tax-Deductible?
Yes, contributions to a 401(k) plan are generally tax-deductible. This means that the amount you contribute is subtracted from your taxable income, potentially lowering your overall tax liability for the year. For instance, if you earn $50,000 and contribute $5,000 to your 401(k), your taxable income may be reduced to $45,000, thereby decreasing the amount of income tax you owe.
However, it is important to note that this tax benefit primarily applies to traditional 401(k) plans. Contributions to these plans are made with pre-tax dollars, which means you defer paying taxes on this income until you withdraw funds during retirement. In contrast, Roth 401(k) contributions are made with after-tax dollars, offering no immediate tax deduction.
Additionally, there are contribution limits imposed by the IRS, which may affect the deductibility of your contributions. For 2023, the contribution limit for employees under 50 is $22,500, and for those 50 and older, it rises to $30,000 due to the catch-up contribution provision.
It is advisable to consult with a tax professional or financial advisor to fully understand how 401(k) contributions can impact your specific tax situation and retirement plan.