Do You Have to Claim a Deduction for Your 401(k) Contributions?

There's an easy way for the IRS to know you funded your retirement plan.

It's a good idea to contribute money to a 401(k) plan if your employer offers one. First of all, you'll need savings to help cover your living expenses once you retire, so the more money you're able to sock away for your senior years, the better. In addition, many employers that sponsor 401(k) plans also match worker contributions to some degree. Taking advantage of those matching incentives is akin to scoring free money.

But another benefit of funding a 401(k) plan is getting an up-front tax break in the process (assuming you put money into a traditional 401(k), not a Roth). And if you contributed to a traditional 401(k) plan in 2022, you may be wondering how to claim that benefit when you file your taxes.

The answer is that snagging that tax break is really easy. And you don't need to claim a specific deduction, either.

Your taxable income is reduced

What tax deductions do is reduce your taxable income. Now you'll often hear that to claim a tax deduction on your return, like medical expenses or mortgage interest, you need to itemize your deductions. But that doesn't always hold true. And you can certainly reap all of the tax benefits you're entitled to for making a 401(k) contribution even if you claim the standard deduction.

In 2022, 401(k) plans maxed out at $20,500 for savers under the age of 50 and $27,000 for those 50 and over. So any dollar amount you contributed to your 401(k) up to these limits could reduce your tax liability.

However, you don't actually claim a specific deduction on your taxes for funding your 401(k) plan. Rather, when you get your W-2 from your employer, which is a form summarizing your wages for the year, any contributions you made to your 401(k) will be subtracted from your taxable wages. So let's say your salary in 2022 was $80,000, but you contributed $10,000 to your 401(k) plan. Your W-2 will essentially report your taxable wages as $70,000, so you don't have to worry about claiming a separate tax deduction.

It pays to fund your 401(k)

The idea of putting money into a 401(k) plan might seem unappealing. After all, why part with money now that you won't be able to touch until you reach retirement age? And why save that money for the future when you have so many bills piling up today?

It's something a lot of people struggle with. But if you can afford to make 401(k) plan contributions, do it. When you put money into a 401(k), you get the opportunity to invest it so it can grow into a larger sum over time. But if you wait until your 50s to start funding that retirement plan, you might end up with less savings than you'd like by the time retirement rolls around.

Plus, the more money you put into your 401(k) plan, up to the annual allowable limit, the more income you shield from the IRS. And that's a win right there.