What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


Can I Claim My 401(k) as a Deduction on My Taxes?

Original post by Mark Kennan of Demand Media

Your 401(k) contributions do not appear on your tax return.

A 401(k) offers tax-deferred growth, which means that earnings through interest accumulated on contributions to the 401(k) are not taxed until you make a withdrawal. The pre-tax contributions that you make to your 401(k) may not be deducted from your taxable income for the simple reason that the income they represent is not part of that included on your Form W-2 in the first place.

Contents

Deduction on W-2

When reporting your income on the line titled "Wages, salaries, and tips" on your federal income tax return, you use the amount in Box 1 — "Wages, tips, other compensation" — of your Form W-2, which your employer must provide to you. When your employer completes the form, it does not include in Box 1 the money you contributed to your 401(k).

Employer Contributions

Your employer may also make contributions for you to your 401(k) during the year. Those contributions also are not included in "Wages, tips, other compensation" on your Form W-2. Because neither your employer's contributions nor your pre-tax contributions are reported as income, you may not deduct them from your income.

Tax Savings of Contributions

The tax savings you reap from your 401(k) contributions and those made by your employer for the year depend on your income tax bracket. If the money were included in your taxable income, it would be taxed at your marginal tax rate — the rate at which your last dollar is taxed. For example, if you and your employer combine to contribute $12,000 and you pay a 37 percent tax rate, you save $4,440 on your taxes.

Retirement Savings Credit

Your contributions — but not those of your employer — to your 401(k) can help qualify you for the retirement savings credit. Your adjusted gross income must fall below the yearly caps and you may not be a full-time student for five or more months during the year. Depending on your income, the credit ranges from 10 percent to 50 percent of the amount you contributed, up to $2,000 of contributions. Therefore, the maximum benefit you may receive is $1,000.


                   

References

About the Author

Mark Kennan is a freelance writer specializing in finance-related articles. He has worked as a sports editor for "Ring-Tum Phi" and published articles on a number of online outlets. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.

Photo Credits

  • Comstock/Comstock/Getty Images


Advertisement