If you’re contributing to a 401(k), you’re likely hoping to save for retirement—and save on taxes. But are those contributions actually tax deductible?

The short answer is: it depends on the type of 401(k) plan you have. In this guide, we’ll break down how traditional and Roth 401(k) contributions affect your taxable income, what employers and the self-employed need to know, and how to take full advantage of the tax benefits available.

How traditional 401(k) contributions reduce your taxable income

When you contribute to a traditional 401(k), that money is taken out of your paycheck before taxes are applied. This lowers your taxable income for the year without requiring you to do anything on your tax return.

For example, if you earn $80,000 and contribute $10,000 to your 401(k), you’ll only be taxed on $70,000 of income. These savings are reflected automatically in Box 1 of your W-2 form, and you don’t need to manually claim a deduction.

According to the IRS, traditional 401(k) contributions fall under "elective deferrals" and are not included in gross income.

Are 401(k) Contributions Tax Deductible?

401(k)'s are tax deductible, but only for traditional 401(k) contributions, and only in a specific way. When you contribute to a traditional 401(k), your employer deducts the contribution from your paycheck before taxes are taken out. This means you never report the contribution as a deduction on your tax return—it’s already accounted for through reduced taxable wages.

For Roth 401(k) plans, contributions are made with after-tax income and are not deductible. Instead, the benefit comes later: qualified withdrawals are tax-free.

Self-employed individuals with a solo 401(k) can deduct their contributions on their tax returns, within annual IRS limits.

How Taxes Are Calculated Based On Your Tax Bracket

One of the most important factors when evaluating 401(k) tax benefits is your tax bracket. Your annual income determines how much tax you owe each year—and how much you save by contributing to a retirement account.

Here are the official federal tax brackets for 2025, based on the IRS’s latest inflation adjustments:

Here’s how tax brackets matter: when you contribute to a traditional 401(k), you reduce your taxable income. This means you could avoid being pushed into a higher bracket or reduce how much of your income is taxed at higher rates.

For example, say you’re a single filer with $90,000 in income. Contributing $10,000 to a traditional 401(k) drops your taxable income to $80,000—moving some of your money out of the 24% bracket and into the 22% bracket.

A few important things to keep in mind:

• Tax rates can change. The Tax Cuts and Jobs Act is set to expire in 2026, and tax rates could rise. So the upfront benefit today might be more valuable if rates go up later.
• Your retirement income may be lower. You could be in a lower tax bracket when you retire, which means the money you take out of your 401(k) might be taxed at a lower rate than it would’ve been today.
• Plan for future flexibility. Saving now with a mix of traditional and Roth contributions can give you more control over your tax situation in retirement.

By understanding how your income and bracket work together, you can better estimate the actual savings from your 401(k) contributions—and plan strategically for the future.

Tax Deductibility for Employers and the Self-Employed

Understanding 401(k) tax benefits isn’t just for employees—employers and self-employed individuals have options too. For business owners, offering a 401(k) plan can not only support your employees’ financial futures but also provide significant tax relief.

If you’re an employer, contributions you make to your employees’ accounts—whether through matching or profit-sharing—are generally considered a deductible business expense. This reduces your company’s taxable income, making 401(k) contributions a win-win: your team benefits from added savings, and your business gets a tax break.

For self-employed individuals, solo 401(k) plans (also called individual 401(k)s) allow you to make contributions both as an employer and employee. This means you can contribute a larger amount overall—and both portions may be deductible. The employee portion reduces your personal taxable income, while the employer portion is deductible as a business expense. You’ll report these contributions using Schedule 1 and Schedule C or Schedule F, depending on how your business is structured.

To learn more about solo 401(k) deduction rules, refer to IRS Publication 560.

How to Maximize Tax Benefits from 401(k) Contributions

To fully take advantage of your 401(k)’s potential, it’s important to go beyond just setting and forgetting contributions. A proactive strategy can significantly enhance your retirement savings and reduce your tax burden now and later.

Here are several ways to make the most of the tax advantages your 401(k) offers:

• Contribute up to the limit: For 2025, individuals can contribute up to $23,500 to a 401(k). If you're 50 or older, you can make an additional $7,500 catch-up contribution. Maxing out your contributions helps shrink your taxable income and build your retirement cushion faster.
• Meet your employer match: If your employer offers matching contributions, contribute at least enough to get the full match. It’s essentially free money—and not taking full advantage leaves tax-deferred savings on the table.
• Coordinate with an IRA: A traditional or Roth IRA can complement your 401(k), offering even more tax benefits and investment flexibility. Depending on your income and coverage, IRA contributions may also be deductible.
• Split contributions: If your plan allows, consider splitting your contributions between a traditional and Roth 401(k). This can balance your tax advantages—saving on taxes now with the traditional portion, and enjoying tax-free income later with the Roth portion.

Taking these steps not only strengthens your retirement plan but also ensures you’re not missing opportunities to reduce your tax liability in the present.

Understanding the Saver’s Credit

The Saver’s Credit is one of the most overlooked yet valuable tools available to low- and moderate-income earners. It rewards you for doing the right thing—saving for retirement—by reducing your tax bill even further.

This non-refundable credit is applied on top of any tax deductions you may already receive for retirement contributions. It’s worth up to $1,000 for individuals or $2,000 for married couples filing jointly.

To qualify for the Saver’s Credit in 2025, your income must fall below certain thresholds:

• $23,000 for single filers
• $34,500 for heads of household
• $46,000 for married couples filing jointly

You also need to be at least 18 years old, not a full-time student, and not claimed as a dependent on another taxpayer’s return. Eligible contributions include those made to a 401(k), 403(b), SIMPLE IRA, traditional IRA, or Roth IRA.

Because it’s a credit (not just a deduction), it lowers your tax liability dollar for dollar—making it a powerful incentive to start or continue saving for retirement.

Eligibility details can be found on the IRS Saver’s Credit page.

What to Know About 401(k) Withdrawals and Taxes

While contributing to your 401(k) gives you upfront tax benefits (for traditional plans), it’s important to understand what happens when you start taking money out—especially since those withdrawals can significantly impact your finances in retirement.

Here’s how different types of 401(k)s are taxed:

• Traditional 401(k): You’ll pay ordinary income tax on withdrawals in retirement. If you withdraw before age 59½ and don’t qualify for an exception (like a hardship withdrawal or disability), you’ll also face a 10% early withdrawal penalty.
• Roth 401(k): Because Roth contributions are made with after-tax dollars, qualified withdrawals are completely tax-free. To qualify, you must be at least 59½ and have held the account for at least five years.
• Required Minimum Distributions (RMDs): Traditional 401(k) holders must begin taking withdrawals by age 73. Roth 401(k)s used to require RMDs as well, but this was eliminated starting in 2024 for employer-sponsored plans.

Planning when and how you withdraw from your 401(k) can help you control your tax liability in retirement. For example, delaying RMDs or converting part of your traditional account to a Roth earlier in life may help you avoid large tax hits later.

Other Ways to Reduce Your Taxable Income

Contributing to your 401(k) is a strong start, but there are other tax-savvy moves you can make:

• Health Savings Accounts (HSAs): Triple tax advantages if you're eligible.
• Flexible Spending Accounts (FSAs): Useful for healthcare and dependent care costs.
• Tax-loss harvesting: A strategy used in taxable investment accounts.
• Deductible IRA contributions: Available if you meet income and coverage limits.

Final Thoughts

Whether you’re trying to reduce your taxable income today or grow tax-free savings for tomorrow, understanding how your 401(k) contributions are taxed is key to building a solid retirement plan.

Traditional and Roth options offer different advantages, and your choice may shift depending on your income, age, and future goals. If you’re unsure how to balance pre-tax versus post-tax contributions—or how this decision fits into your larger financial strategy—you don’t have to figure it out alone.

We recommend working with a Certified Financial Planner® to find the best ways to reduce your tax burden both now and after retirement.