401(k) Contributions & Their Tax Impact (2025)
Last updated: June 2025
A traditional 401(k) is one of the most effective ways to reduce your federal tax bill while saving for retirement. Because contributions come out of your pay before income tax, every dollar you contribute lowers your taxable income. Here is how it works in 2025.
How pre-tax contributions reduce tax
Traditional 401(k) contributions are deducted from your gross pay before federal income tax is calculated. If you are in the 22% bracket, a $1,000 contribution reduces your tax bill by about $220 — so the contribution only costs you around $780 in take-home pay.
2025 contribution limits
For 2025 you can contribute up to $23,500 to a 401(k) if you are under 50. Those aged 50 and over can make an additional catch-up contribution. Employer matching contributions do not count toward your personal limit.
What 401(k) does not reduce
Traditional 401(k) contributions reduce your federal (and usually state) income tax, but they do not reduce FICA — Social Security and Medicare are still calculated on your full gross wage. Roth 401(k) contributions, by contrast, are made after tax and do not reduce current taxable income at all.
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