Your contributions to a traditional 401(k) plan are made with pretax dollars. This means your contributions are deductible. The 401(k) deduction limit 2021 is increased with the 401(k) contribution limits. Since all of your contributions are qualified for a deduction, you can reduce your taxable income with your contributions.
For the 202, the 401(k) contribution limit is expected to reach $20,000 from $19,500 in 2019. Those who are over the age of 50 also qualify for the catch-up contribution. This increases the total 401(k) contribution by $6,500. This is the annual contribution limit given to those who are at the age of 50 or older.
Regardless of your contribution amount, these are deductible from your taxable income. Whether you contribute $1,000 or $20,000, the contributed amount will be subtracted from your taxable income.
One thing to keep in mind is if your employer offers to match your contributions, you cannot deduct these. Only the amount you contribute is tax deductible. Having said that, your maximum deduction will be as follows.
- Under the age of 50: $20,000
- Over the age of 50: $26,500
Traditional 401(k) Contributions
To claim the 401(k) contributions deduction, the type of 401(k) retirement plan you have matters significantly. If you have a Roth 401(k) or other unqualified plans, you won’t be able to claim a deduction for your contributions.
You can only claim contributions made to a traditional 401(k) or other qualifying plans. As a general rule, if you don’t pay taxes on your contributions, you can deduct the amount contributed. Other types of 401(k) such as Roth aren’t tax-deductible. Only pretax dollars will grant you a tax deduction.
Take note that you can claim the 401(k) contributions deductions even if you take the standard deduction. The 401(k) deduction is considered as above-the-line deductions. If you contribute a high amount every year, you can easily place yourself at a lower tax bracket, thus, pay less tax. This is one of the reasons why the IRS has contribution limits—to prevent highly compensated employees from benefiting more than an average worker.