401k is the most accessible retirement savings option for millions of Americans. Now that there are talks about automatic 401(k) for those that aren’t offered by their employers, it’s becoming even more critical.
The same as the IRA contributions, funding certain 401k accounts are deductible. You’re qualified to deduct as much as you claim. Considering that 401k has a higher contribution limit than IRA, you get much better tax benefits for saving up for retirement. See 401k contribution limits for 2022.
How to claim 401k deduction on 1040?
When preparing your federal income tax return, you won’t write off your retirement account contributions on Form 1040. Instead, you’ll use Schedule 1, as the 401k contribution deduction is considered as an adjustment. In other words, the adjustments are above-the-line deductions.
For the 2021 taxes you’ll file in 2022, Schedule 1 has changed drastically. The Internal Revenue Service shared the draft version of Schedule 1 for 2022.
However, you won’t need to do anything on your tax return if you contribute to a traditional 401(k). On Form W2, your employer will report your gross income and any contribution to a traditional 401(k) or another qualified retirement plan. If the account is funded with pre-tax dollars like in a traditional 401(k) or IRA, it won’t be included in gross income.
Having that said, you don’t need to do anything special to write off 401(k) contributions. But, you’ll need to claim it on taxes if you have a traditional IRA.
Are employer contributions deductible?
Thousands of companies offer to match a certain percentage of what you contribute to a 401(k). The additional contributions made by your employer on top of what you contribute aren’t deductible. As these contributions are funded by your employer, you won’t get any tax benefits for them.
Only the contributions you made to your traditional 401(k) aren’t going to be included in your gross income.