Lesson 6 - Tax advantages of the 401(k)

3 MIN READEditorial Policy

The IRS allows you to save more money in a 401(k) when compared to other types of retirement accounts. But there are other tax benefits of contributing to a 401(k). 

Tax advantages of your 401(k)

  • Pre-tax deductions can help reduce your taxable income by your annual contribution amount. Depending on your situation, this could potentially put you in a lower income tax bracket.

  • Pre-tax contributions grow tax-free. This means you don't have to pay taxes on earnings and investment gains each year. Plus, your growth is tax-sheltered until you withdraw the funds in retirement.

  • Low- and moderate-income individuals who meet specific eligibility criteria and income levels may qualify for a saver's credit of up to $1,000 ($2,000 for married couples filing jointly).

How much is the saver’s credit?

The saver’s credit can reduce what you pay in taxes by up to $1,000 ($2,000 if married filing jointly).

Who qualifies for the saver's credit? 

The saver’s credit is offered by the IRS to help offset short-term financial losses when funding a retirement account. There are restrictions on eligibility, including a cap on adjusted gross income.

To receive the credit, you must be 18 years or older, and your 2024 adjusted gross income must be less than:

  • $73,000 if married filing jointly

  • $54,750 if filing as head of household

  • $36,500 for all other taxpayers

Additionally, those taking the saver’s credit cannot be full-time students for five months or more, or considered as a dependent for tax purposes.

Learn more about the saver’s credit

Claudia Newman manages the Retirement Education team that helps onboard employees to their Human Interest plan and explains the benefits of a 401(k) plan by offering live training. She has been working in the 401(k) and retirement plan industry in several capacities, including relationship management, sales, and back-office support since 2010.

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The (k)ickstart™ program is administered and offered by the recordkeeper, Human Interest Inc. ("HII"). HII's subsidiary and registered investment adviser, Human Interest Advisors ("HIA"), receives a fee based on assets under management. As such, HIA will earn more in asset-based fees if a plan participant increases their contribution in connection with the program.