The tax benefits of your 401(k) plan

• The tax-deferred 401(k)
• And the Roth 401(k) introduced in 2006

Tax-deferred 401(k)s reduce taxable income

• The SIMPLE 401(k) for businesses employing fewer than 100 people
• The Safe Harbor 401(k), in which employees always own 100% of any money their employer contributes
• The traditional 401(k) popular with companies that have large workforces.
• Traditional tax-deferred 401(k)s used by self-employed savers without any employees are sometimes referred to as "Uni-ks" or “Solo Ks."

• When you contribute 6% of your salary into a tax-deferred 401(k)— $2,100—your taxable income becomes $32,900.
  • $35,000 x 0.06 = $2,100
  • $35,000 - $2,100 = $32,900
• The income tax on $32,900 is $525 less than the tax on your full salary. So, not only do you get savings for retirement, you save on taxes today.

Tax-deferred interest with 401(k)s

Withdrawal timing to save taxes

• Withdraw money early, though, and you pay taxes and a 10% penalty.
• The IRS lets you begin to withdraw without a penalty at age 59 1/2, and requires you to begin withdrawing by April 1 the year after you turn 70 1/2.

Roth 401(k)s reduce post-retirement taxes

• you're 59 1/2 and
• you've had the account for five years.

• Savers who believe their income during retirement will be low usually opt for a traditional 401(k).
• Those who predict they will have more income and fall under a higher tax bracket when they leave the workforce prefer the Roth 401(k).

• Taxpayers have the option of funding both a Roth 401(k) and a tax-deferred 401(k).
• The IRS adjusts the maximum contribution amount to account for cost-of-living and announces the annual limits for each type of 401(k) at least a year in advance.
• Traditionally, the IRS has provided an additional contribution option for savers age 50 and older to enable them to prepare for their pending retirement - $6,000 in 2018.

Tax benefits for saving

• The saver's credit directly reduces your taxable income by a percentage of the amount you put into your 401(k).
• Since its introduction in 2002, this credit for retirement savings has ranged from $1,000 to $2,000.
• Eligible taxpayers calculate their credit using form 8880 and enter the amount on their 1040 tax return.

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