Retirement savings and taxes: Your complete guide to IRA and 401(k) contributions and withdrawals

How do retirement contributions reduce your taxes?

Contributions to traditional retirement accounts, like traditional 401(k)s and IRAs, are tax- deferred, which means that you don’t pay tax until you start making withdrawals in retirement. The more you contribute now, the more it reduces your current taxable income and, therefore, your tax for the year.

If you have a Roth IRA or Roth 401(k) on the other hand, your contributions are not tax deferred. That means that you’re required to pay tax on the funds now, but do not have to pay when you take withdrawals from the account during retirement.

401(k) contribution limits for 2026

For 2026, you can contribute up to $24,500 to your 401(k) if you're under 50. If you're 50 or older, you can make up to $8,000 in additional catch-up contributions, bringing your grand total to $32,500. If you’re a worker between the ages of 60 and 63, you can make even more catch-up contributions, up to $11,250, for a total of $35,750.

These same contribution limits also apply to 403(b) plans, most governmental 457 plans, and the federal Thrift Savings Plan.

IRA contribution limits for 2026 

For a traditional IRA in 2026, you can contribute up to $7,500 if you’re under 50. If you are 50 or older, you can make up to $1,100 in additional catch-up contributions, bringing your grand total to $8,600.

Contribution limits are the same for a Roth IRA, but the IRS has phase-out limits on how much you can contribute based on your MAGI (modified adjusted gross income). Essentially, this means the higher your MAGI is above the lower limit, the less you can contribute to a Roth IRA, and if your MAGI is above the top limit, you cannot contribute to a Roth IRA at all.

2026 phase-out limits for Roth IRA contributions

IRA deduction limits: Can you deduct your IRA contribution?

Whether or not you can deduct IRS contributions depends on the type of IRA you have and your MAGI. If you have a traditional IRA, you can deduct your contributions from your taxable income, and the IRS phases out how much you can deduct based on your MAGI if you (or your spouse) are contributing to a workplace retirement plan. Essentially, that means the more your MAGI is above the limit, the less you can deduct based on your contributions.

2026 phase-out limits for deductions based on traditional IRA contributions

Contributions you make to a Roth IRA are not tax deductible and may be limited based on your MAGI. (See the table in the section above for more details.)

How does retirement savings affect your adjusted gross income? 

Whether or not retirement savings affect your AGI (adjusted gross income, which is your total income adjusted for certain deductions) depends on the type of account you’re contributing to.

• Traditional 401(k) contributions: Lower your AGI automatically and come out of your paycheck before tax is calculated.
• Traditional IRA contributions: Lower your AGI but work a bit differently. Because they’re made with money you’ve already received and been taxed on, if you qualify, you can deduct your contributions when you file your return, which lowers your AGI.
• Roth IRA contributions: Don’t impact your AGI, since they’re made with after-tax dollars.

Traditional IRA vs. Roth IRA: Which is better for your taxes? 

The short answer is it depends on whether you’d prefer to pay taxes now or during retirement.

With a traditional IRA, you could deduct your contributions now if you qualify, but you’ll be responsible for paying tax on every dollar you withdraw from it during retirement. On the other hand, you won’t see an immediate tax benefit from contributing to a Roth IRA, but your money will grow tax-free, and you won’t have to pay tax on withdrawals you make during retirement, either.

In general, a traditional IRA may make sense if…

• You’re in a higher tax bracket now than you expect to be during retirement.
• You’re trying to reduce your taxable income this year to qualify for other credits or to drop to a lower tax bracket.
• You’re close to retirement and have less time to benefit from tax-free compounding growth.

In general, a Roth IRA may make sense if…

• You’re in a lower tax bracket now than you expect to be during retirement.
• You’re younger and have more time to benefit from tax-free growth.
• You want more flexibility to withdraw contributions without tax or penalties. Keep in mind that this only applies to contributions, not earnings, which are subject to a 10% early-withdrawal penalty.
• You don’t want to have to worry about RMDs (required minimum distributions at a certain age), which do not apply to Roth IRAs.

What is the Saver's Credit and who qualifies?

The Retirement Savings Contributions Credit, often called Saver’s Credit, is a tax credit worth up to $1,000 ($2,000 if married filing jointly) and created to encourage low- to moderate-income workers to contribute to retirement plans. Since this benefit is a credit, it provides an even bigger tax advantage than the deductions we’ve covered so far, because credits reduce your tax directly, whereas deductions only lower your taxable income.

Here’s how the Saver’s Credit works:

You can claim 50%, 20%, or 10% of the first $2,000 you contribute to a qualifying account, depending on your filing status and AGI. Qualified retirement accounts include traditional IRAs, 401(k)s, 403(b)s, governmental 457(b)s, SIMPLE IRAs, SEP-IRAs, the Thrift Savings Plan, and ABLE accounts.

To qualify, you must…

• Be at least 18
• Not be a full-time student
• Not be claimed as a dependent on someone else’s tax return
• Have an AGI that falls within the qualifying income limits.

2026 Saver's Credit income limits

Early withdrawal penalties: What happens if you take money out early?

In general, the IRS makes it expensive to pull money out of retirement accounts early because they are designed to encourage you to save for retirement. However, the type of retirement account you’re withdrawing from, as well as the amount you’re withdrawing, can impact what that early-withdrawal penalty and/or tax amounts to.

If you make a withdrawal from a traditional 401(k) or IRA before you’re 59^1/2, the IRS will require you to pay a 10% penalty, plus your regular income tax rate. On the other hand, if you make a withdrawal from a Roth IRA before you’re 59^1/2 (and the account is less than 5 years old), the IRS will only require you to pay a 10% penalty and your regular tax rate on your earnings, not your contributions.

The IRS does allow for early, penalty-free withdrawals in certain situations, such as buying your first home, birth or adoption expenses, terminal illness, and more. Keep in mind that these exceptions are dependent on the type of retirement savings account you have.

How to maximize your retirement tax savings in 2026 

1. Pick the right retirement account: Roth or traditional? 401(k) or IRA? These are just the very basics when it comes to retirement accounts, and each one can impact your taxes in different ways. Identifying your goals and then taking the time to find the retirement account that matches them are the first steps toward maximizing your tax savings in 2026 and beyond.
2. Lower your taxable income with traditional 401(k) contributions: Every dollar you put into a traditional 401(k) can lower your taxable income for the year and, therefore, your tax bill. It could also help you qualify for credits and deductions that phase-out at higher MAGI levels.
3. Take advantage of the later IRA deadline: The deadline to contribute to a 401(k) is December 31, 2026, but you can contribute to an IRA for the 2026 tax year until April 2027. That gives you more time to plan your contributions and how they impact your overall tax picture.
4. Claim the Saver’s Credit if you qualify: This is the last year to take advantage of the Saver’s Credit, before it is replaced by the Saver’s Match program in 2027. If you qualify, don’t miss out on this generous credit.
5. Don’t forget about your HSA (Health Savings Account): Did you know that you can withdraw funds from the HSA for any reason after the age of 65, paying only your regular income tax rate? Contributions you make to your HSA can reduce your taxable income the same way contributions you make to your traditional 401(k) or IRA can, plus you’ll enjoy tax-free growth.

Have questions or concerns about retirement savings and your taxes? Walk in or book now. Your local Jackson Hewitt Tax Pro is here all year and ready to help.

This article is for general information and isn’t tax advice. IRS rules and fees can change, and your best option depends on your specific facts.