Table of Contents

401(k) contributions and tax implications

How the 401(k) can reduce taxes

Tax savings for employers who contribute to their employees’ 401(k)s

How to report 401(k) contributions on a tax return 

Other ways to reduce taxable income

401(k) Plan Types

The bottom line

Learn401(k)Are 401(k) Contributions Tax Deductible?

Are 401(k) Contributions Tax Deductible?

Sep 12, 2022


5 min read

By making elective deferral contributions to a 401(k) plan, employees will reduce their current taxable income and withholding without having to take a tax deduction.

Not only is a 401(k) plan a big slice of the retirement savings pie for many, they can offer significant tax savings, too, as pretax contributions to a 401(k) plan can reduce annual tax liability. But confusion sometimes arises over the question “Are 401(k) contributions tax deductible?” The answer is: Not exactly. You don’t deduct 401(k) contributions from your tax obligation. Instead, your taxable salary is reduced by the amount of the contribution.

401(k) contributions and tax implications

Employee contributions to a 401(k) company plan are known as elective deferrals, meaning an employee authorizes and designates a portion of their salary to be contributed to the 401(k) plan. 

In the most common scenario, elective deferrals are made on a pretax basis, though some employers allow deferrals on an after-tax basis, too. For pretax deferrals, the contribution amount is subtracted from gross pay, thus reducing taxable income. It feels like a tax deduction, but technically, it’s more like a salary reduction. 

This doesn’t mean the contribution will never be taxed. 401(k) taxes will apply during retirement when the individual starts taking distributions. At that time, the individual may be in a lower tax bracket. 

How the 401(k) can reduce taxes

A simple example shows how 401(k) contributions can lower an employee’s taxable income. Imagine a worker with a salary of $90,000 who is in the 22% income tax bracket. This worker contributes $10,000 in elective deferrals to a 401(k) for the year. This would reduce their taxable income to $80,000. Because this worker is close to the borderline between tax brackets, the salary reduction results in a lower tax bracket, from 22% to 12%. The $10,000 contribution is tax deferred, meaning they pay taxes on the amount when it’s withdrawn, usually in retirement. 

The saver’s tax credit 

Besides elective deferrals, those who save in employer retirement plans might qualify for the IRS’s saver’s tax credit. This credit can save individuals up to $1,000 ($2,000 for joint filers) in taxes. It applies only when adjusted gross income is below these 2022 levels set by the IRS: $68,000 as a married joint filer, $51,000 as a head of household, $34,000 for any other filing status. 

To calculate the saver’s tax credit, you would take 50%, 20%, or 10% of the amount contributed to a traditional individual retirement account (IRA), Roth IRA, 401(k), SIMPLE IRA, ABLE account, SARSEP, 403(b) or 457(b) plan. The percentage reduction depends on income level. 

Tax savings for employers who contribute to their employees’ 401(k)s

While employees don’t need to deduct contributions to a 401(k), employers can deduct the matching contributions they make from their business profit. Beyond this, employers could benefit from recent changes to retirement plan rules found in the SECURE Act, which became law in 2020.

  • Tax credits for small business retirement plans

    . For small businesses that would otherwise find the cost of providing a 401(k) prohibitive, the act offsets costs by giving a tax credit to small employers (those with up to 100 employees) when they start a workplace 401(k) plan. 

  • Pooled Employer Plans can save on administration fees

    . Another provision permits access to Pooled Employer Plans (PEPs). Small employers can team up to offer a collective 401(k) plan to employees, which can save on administrative costs. 

How to report 401(k) contributions on a tax return 

Individual savers don’t have to report 401(k) contributions on tax returns. Every contribution made to the plan with pretax money already reduces taxable income and tax withholding.  

The employer will report elective deferrals on an employee’s W-2 Wage and Tax Statement. While they aren’t considered income on the federal tax return, Social Security, Medicare, and Federal Unemployment Taxes do count them as current taxable income.

At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.

Get Started

Other ways to reduce taxable income

There are other viable options for retirement savers who are looking to reduce taxes, including IRAs and 403(b) plans. 


Some, but not all, types of IRAs can have immediate tax benefits. 

  • Traditional IRAs

    . Traditional IRAs allow federal income tax deductions on contributions,  as much as $6,000 a year; those over 50 can invest $7,000. A full deduction can be taken if the employer doesn’t offer a retirement plan. Limits on the deduction amount apply when an individual or spouse has an employer retirement plan, and when income exceeds certain levels.  

  • SEP IRAs

    . The SEP IRA is designed for self-employed individuals who don’t otherwise have access to an employer 401(k). Contributions to a SEP IRA can qualify as tax deductions from business income—or up to 25% of net business profits with an upper limit of $61,000 for 2022.

  • Roth IRAs don’t apply

    . Because Roth IRAs are funded with after-tax contributions, they don’t have immediate tax benefits.   

403(b) plans

A 403(b) plan is like a 401(k), but it’s designed for employees at public schools, tax-exempt organizations, and in some circumstances, clergy. Employees can make elective deferrals and the employer can match contributions. Income tax won’t apply until retirement distributions are taken. 

401(k) Plan Types

There are a number of different kinds of 401(k) plans, each with its particular tax rules and benefits. They include:

  • Traditional 401(k) plans

    . Employees can make pretax elective deferrals through payroll deductions, and employers can make matching contributions, which in some cases are subject to a vesting schedule. 

  • Roth 401(k) plans

    . Some employers offer Roth 401(k) plans. The difference between a traditional and Roth 401(k) is that contributions to Roth plans are taxed, but earnings and withdrawals during retirement are tax-free.

  • Safe harbor 401(k) plans

    . A safe harbor 401(k) plan is designed to let all employees receive employer contributions. In a safe harbor for 401(k), average contributions of high-wage earners can’t exceed other plan participants by more than 2%. 

  • SIMPLE 401(k) plans

    . Qualifying small businesses can set up a SIMPLE 401(k) plan, which stands for Savings Incentive Match Plan for Employees. Employers with fewer than 100 workers who earned at least $5,000 per year can participate in this plan. 

The bottom line

By making elective deferral contributions to a 401(k) plan, employees will reduce their current taxable income and withholding without having to take a tax deduction on the federal income tax form. Tax obligations are deferred until distributions are taken in retirement; this is when a 401(k) is taxed. Other methods to reduce taxes such as the saver’s credit and funding IRAs with pretax dollars may be available for those who qualify.

Side note: Try Titan’s free 401(k) Calculator to project how much your 401(k) will give you in retirement.


Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.

Three Things, a newsletter from Titan

Stay informed on the most impactful business and financial news with analysis from our team.

You might also like

401(k) vs. IRA: Which Should You Choose?

There are some important distinctions between 401(k)s and IRAs, that investors consider to learn how each account type would impact their retirement savings strategy.

Read More

What Is a Solo 401(k)? Retirement Account For the Self-Employed

A solo 401(k), also called a self-employed 401(k) is a tax-advantaged retirement plan with high contribution limits made available for self-employed individuals.

Read More

How to Set Up a 401(k) for Small Business Owners

A 401(k) can help a small employer attract and retain workers, while potential tax credits and deductions can defray some of the costs of setting up such a plan.

Read More

What Is a 401(k) Plan?

A 401(k) is a retirement savings vehicle offered by many employers. It offers tax advantages and investment opportunities and has higher contribution limits than other retirement accounts.

Read More

Cash Management

Smart Cash

Smart Cash FAQs

Cash Options

Get Smart Cash


© Copyright 2024 Titan Global Capital Management USA LLC. All Rights Reserved.

Titan Global Capital Management USA LLC ("Titan") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). By using this website, you accept and agree to Titan’s Terms of Use and Privacy Policy. Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities or investment products. Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Account holdings and other information provided are for illustrative purposes only and are not to be considered investment recommendations. The content on this website is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services.

Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.

Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.

The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit for applicable terms and conditions and important disclosures.

Cryptocurrency advisory services are provided by Titan.

Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.

Contact Titan at 508 LaGuardia Place NY, NY 10012.