Lesson 6 - Tax advantages of the 401(k)

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).

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.