Technically, you do not make payments into your 401k plan when you make contributions. Instead, you defer compensation into the plan because it is a tax-deferred account. Though it still has the effect of saving you money on your taxes, understanding how you pay money into your 401k plan, and how those payments affect your taxes for the year, will help you better anticipate your tax liability.
No Deduction for 401k Elective Deferrals
You do not get to claim a deduction for elective deferrals to your income taxes because the deferrals are already accounted for by your employer when calculating your income tax withholding and taxable income for the year. The amount you choose to defer can be up to the annual limit or your compensation for the year, whichever is smaller. As of the time of publication, you can choose to contribute up to $16,500 in salary into your 401k plan.
Tax Effects of Elective Deferrals
When you make elective deferrals to your 401k plan, your employer counts it as pretax dollars and does not include it in your total taxable income for the year. For example, if your employer paid $55,000 but you elected to defer $8,200, your W-2 Form would only show that you have $46,800 in taxable income. The amount this saves you on your federal income taxes depends on your income tax bracket: the higher your tax bracket, the greater the savings.
Employer Matching Payments to Your 401k Plan
You cannot deduct money your employer pays into your 401k plan on your behalf. This money is neither counted in your taxable income nor are you allowed to claim an income tax deduction for it. Employer matching contributions do not affect your income taxes until you take distributions from your plan, at which point the money counts as taxable income. Until then, the money grows tax-sheltered in the account, so you do not have to pay any income taxes on the gains.
401k Plan Loan Repayments
When you take out a 401k plan loan, you cannot claim an income tax deduction for the money that you repaid. The money you repay, including the interest that you pay, goes back in your account -- you are replacing money that you already received a tax deduction for when you made the contribution. Therefore, allowing a deduction for the repayment would be effectively allowing you a second deduction for the same contribution.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."