Money you put in a traditional 401(k) or deductible IRA comes off your taxable income, so in the 22% federal bracket, a $100 contribution costs you about $78. Figure that cost at your own tax rate before you decide you can’t afford to save more.
The tax cut doesn’t wait for retirement. With a traditional 401(k), it shows up in your paycheck.
A traditional 401(k) contribution comes out of your pay before federal income tax is withheld, and it doesn’t count as wages on your tax return. In the 22% bracket, adding $100 a paycheck lowers your federal withholding by about $22, and in the 12% bracket by about $12. Social Security and Medicare taxes still apply to the full $100.
A traditional IRA delivers the same break through your tax return instead. If neither you nor your spouse is covered by a workplace retirement plan, you can deduct the full contribution. If either of you is, the deduction phases out as income rises, so check the IRS’s current income limits before you count on it.
Log in to your benefits portal and raise your contribution rate, even by one or two percentage points. Check that the money is going in as traditional rather than Roth, since Roth contributions go in after tax and don’t lower this year’s bill. A 401(k) contribution can only come out of a paycheck, so the sooner you change it, the more of this year’s pay it covers.
An IRA gives you more time than a 401(k). You can contribute for a given year until the deadline for filing that year’s return, usually April 15 of the following year, and an extension doesn’t push it back. Money you put in during early spring can still lower the bill on the return you’re about to file. Tell your IRA provider which year it’s for.
Neither traditional account cancels the tax. Withdrawals are taxed as income, so the trade works in your favor when your tax rate today is higher than the one you expect in retirement.
Compare the best places to open an IRA to choose a provider.
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