Newington, CT — As tax season approaches, many individuals are reviewing ways to reduce taxable income and boost retirement savings. One of the most effective strategies is contributing to a traditional 401(k) retirement plan, which offers valuable tax benefits now and potential financial flexibility later.
At AAG Tax & Accounting LLC, we help Connecticut individuals and families make informed decisions about retirement planning and tax strategies. Below is an overview of how 401(k) contributions can impact your taxes and help you save more effectively.
How a 401(k) Works to Reduce Your Taxable Income
When you contribute to a traditional 401(k), your contributions are made with pre-tax dollars, meaning they are taken out of your paycheck before federal income tax is calculated. While technically not a “deduction” you report on your tax return, the effect is similar: your taxable income is reduced, lowering the amount you owe for the year.
For example, if your taxable income is $85,000 and you contribute $20,000 to a 401(k), you could see a meaningful reduction in your current tax liability. The exact savings depend on your tax bracket and other personal tax factors.
Contribution Limits You Should Know
The IRS sets annual limits for how much you can contribute to your 401(k):
In 2026, the employee contribution limit is $24,500.
If you’re age 50 or older, you can make an additional catch-up contribution of $8,000, for a total of $32,500.
Overall contribution limits—including employer contributions—are $72,000 in 2026, increasing based on age and plan specifics.
These limits apply whether you participate in a traditional 401(k) or a Roth 401(k). Planning ahead and maximizing contributions within these limits can provide both tax advantages today and greater retirement savings in the future.
Traditional vs. Roth 401(k) Contributions
Traditional 401(k) contributions reduce your taxable income now, while Roth 401(k) contributions use after-tax dollars, meaning they don’t lower your tax bill in the contribution year but may allow tax-free withdrawals in retirement if certain conditions are met.
Planning which type of contribution is right for you depends on your current tax situation and future income expectations. AAG Tax & Accounting LLC can help evaluate your options based on your long-term goals.
Employer Contributions and Tax Considerations
Many employers offer matching 401(k) contributions. While these don’t count against your individual contribution limit, they do count toward the overall annual limit. Employer matches are also typically pre-tax and grow tax-deferred in your account.
It’s important to consult with a tax professional to understand how employer matches and your contributions interact with your overall tax strategy.
When You Pay Taxes on 401(k) Withdrawals
While traditional 401(k) contributions may reduce your taxable income now, you will generally pay ordinary income tax on withdrawals in retirement. If you expect your retirement income to be lower than your current income, this can be a tax-efficient strategy over the long run.
Need Help Maximizing Your Retirement Benefits?
401(k) plans offer a powerful blend of tax savings and retirement planning benefits, but understanding how to make the most of them can be complex. At AAG Tax & Accounting LLC, we specialize in helping clients in Connecticut and nationwide optimize their retirement contributions and tax strategies.
Contact us to review your 401(k) contributions, plan for year-end tax savings, and build a retirement strategy that aligns with your financial goals.