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 2023 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.
Article ByClaudia Newman
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.