How to Lower Your Taxable Income with Retirement Accounts
Smarter ways to keep more of your paycheck.
One of the smartest ways to keep more of your paycheck today and build long-term wealth is by using retirement accounts. These accounts don’t just help you save for the future they can also lower your taxable income right now, which means you could owe less in federal (and sometimes state) taxes.
Why Retirement Accounts Save You Money on Taxes
When you put money into certain retirement accounts, like a 401(k) or a traditional IRA, that contribution gets deducted from your taxable income. This means the IRS sees you as earning less money than you actually did, which can:
Lower the income tax bracket your top dollars fall into.
Reduce the overall amount of taxes you pay this year.
Help you save money that grows until you need it in retirement.
Types of Retirement Accounts That Lower Taxable Income
1. 401(k) or 403(b) (Workplace Plans)
Contributions come straight from your paycheck before taxes are taken out.
For 2025, you can contribute up to $23,000 if you’re under 50.
Many employers also offer a match (free money), but even if they don’t, your contribution reduces your taxable income.
Example: If you make $50,000 and contribute $5,000 to your 401(k), the IRS only taxes you on $45,000.
2. Traditional IRA (Individual Retirement Account)
You can open this on your own (no employer required).
For 2025, you can contribute up to $7,000 (or $8,000 if 50+).
Contributions are often tax-deductible, which lowers your taxable income.
Note: Deductibility may phase out if you also have a 401(k) and your income is above certain limits, but many young earners qualify.
3. Health Savings Account (HSA) If You Qualify
If you have a high-deductible health plan, you can open an HSA.
Contributions are triple tax-advantaged:
Tax-deductible when you put money in
Tax-free growth
Tax-free withdrawals for medical expenses
2025 limits: $4,300 for individuals and $8,550 for families.
Even though it’s not a “retirement account” in the traditional sense, many people use HSAs as long-term savings because after age 65, withdrawals for non-medical expenses are treated like a traditional IRA.
How Much Could You Actually Save?
Let’s say you earn $50,000 and put 10% ($5,000) into your 401(k):
Without the contribution → taxed on $50,000.
With the contribution → taxed on $45,000.
If you’re in the 22% bracket, that saves you $1,100 in taxes this year and your money is still yours, just waiting for you in retirement.
Retirement Accounts That Don’t Lower Taxable Income Today
It’s also worth noting that Roth accounts (like Roth 401(k)s or Roth IRAs) don’t reduce your taxable income when you contribute. You put in money you’ve already paid taxes on, but withdrawals in retirement are 100% tax-free.
So, if your goal is to save money on taxes this year, focus on traditional accounts. If your goal is to have tax-free income in retirement, Roth accounts may be better.
Key Takeaways
Traditional retirement accounts = lower taxable income now.
Roth retirement accounts = tax-free income later.
Even small contributions make a difference both for your future savings and your current tax bill.
Contributing to a 401(k), IRA, or even an HSA if you qualify is one of the few ways you can directly lower your taxable income and keep more money in your pocket at tax time while still saving for your future.
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