Traditional 401(k) contributions can lessen adjusted gross income (AGI) and modified adjusted gross income (MAGI) as employees can withhold part of their salaries for tax deductions in a current year. On the contrary, Roth 401(k) contributions are made using post-tax income, hence it doesn't provide an immediate tax deduction.
To initiate a contribution to a 401(k), the employer must provide such a plan, and the employee must be eligible. Contributions then reduce the employee’s taxable income up to specified IRS limits, however this rule is not valid for Roth contributions. The annual contribution limit varies and is higher for individuals above 50 years of age. Taxes on 401(k) deposits apply only during their distribution.
Traditional 401(k)s tend to be more appealing to those striving to reduce their AGI or MAGI since they provide an opportunity for tax deferral and lower current taxable income. This also bypasses the notably smaller IRA maximum contribution limit.
A Roth 401(k) operates similarly to its traditional counterpart but is sustained by post-tax income. Despite its non-deductibility, withdrawals after the age of 59½ or certain hardship exemptions – provided the account is over five years old - are tax-free. While Roth IRA accounts may require certain income limits, Roth 401(k) plans, however, do not.
The upper limit for 401(k) contributions as of 2026 is $24,500 – increasing to $32,750 for those aged 50-63 – yet post-deduction salaries remain unaffected. Contributing to your traditional 401(k) can reduce your taxable income now, which could be beneficial if you expect to fall under a lower tax bracket by retirement.