Retirement Contributions: A Simple Way to Reduce Your Taxable Income

Tax season is more than just filing your return. It is also an opportunity to look at the decisions you can make today that may improve your tax situation in the future.

One of the most common tax-planning opportunities is retirement savings.

Depending on the type of retirement account you use, your contributions may reduce your taxable income today, provide tax-free income in retirement, or offer other tax benefits.

At Ultiemily Advisory Services, we believe tax planning should be about more than simply preparing a return. Understanding how retirement contributions affect your taxes can help you make more informed financial decisions throughout the year.

What Reducing Adjusted Gross Income (AGI) Means and Why it Matters

Reducing your Adjusted Gross Income (AGI) can be an important tax-planning strategy because AGI is used as the starting point for determining may tax benefits, deductions, credits, and income-based limitations.

Your AGI is generally your total taxable income before you apply the standard deduction or itemized deduction. The AGI is the income subject to taxation so this number is very important in your tax calculation.

Not All Retirement Contributions Reduce Your Taxes Today

The tax treatment of retirement contributions depends on the type of account.

Traditional 401(k), 403(b), and Other Pre-Tax Employer Plans

When you contribute to a traditional 401(k) or similar employer-sponsored retirement plan with pre-tax dollars, your contribution generally isn't included in your current taxable wages.

For example:

Suppose you earn $70,000 in W-2 wages and contribute $10,000 to a traditional 401(k).

Rather than being taxed on the full $70,000 of wages for federal income tax purposes, your taxable wages are generally reduced by the $10,000 contribution.

That means you are putting money toward retirement while potentially reducing your taxable income for the current year.

Your employer may also contribute matching or other amounts to your retirement account. Employer contributions generally aren't included in your taxable wages when contributed.

Important: Annual contribution limits apply, so it is important to make sure you do not exceed the allowable limits for your plan. Please see 2026 chart at the end of this blog post.

Traditional IRA Contributions May Also Reduce Your AGI

A traditional IRA can provide another opportunity for a current-year tax deduction.

If you qualify, contributions to a traditional IRA may be deductible on your tax return. Unlike a deduction that you might take after calculating your AGI, an eligible traditional IRA deduction is an "above-the-line" adjustment that can reduce your adjusted gross income (AGI).

For example, if you have $50,000 of income and make a $6,500 deductible traditional IRA contribution, your AGI could be reduced by $6,500.

However, not everyone receives the full deduction.

Your eligibility can depend on factors such as:

• Your income

• Whether you or your spouse participates in an employer retirement plan

• Your filing status

• Applicable IRA deduction phaseout rules

This is why it is important to review your individual tax situation before assuming an IRA contribution will be deductible.

What About a Roth IRA?

A Roth IRA works differently.

Roth IRA contributions are made with after-tax dollars, so they generally do not reduce your AGI today.

Instead, the potential tax benefit comes later.

Qualified Roth IRA withdrawals can generally be tax-free in retirement.

This creates an important tax-planning decision:

Traditional retirement contributions: Potential tax benefit today

Roth retirement contributions: Potential tax-free income later

Neither option is automatically right for everyone. The better fit depends on your current tax situation, expected future income, retirement goals, and other factors.

What About a Roth 401(k)?

A Roth 401(k), sometimes called a designated Roth account, follows the same basic concept.

Your contribution is made with after-tax dollars, meaning it does not reduce your current taxable income.

The potential benefit comes from having qualified withdrawals in retirement treated as tax-free.

If your employer offers both traditional and Roth 401(k) options, it may be worth reviewing how each choice fits into your overall tax strategy.

Retirement Planning for Small-Business Owners

Retirement planning becomes especially important for business owners.

Small-business owners and self-employed individuals may have access to retirement options such as:

• SEP IRAs

• SIMPLE IRAs

• 401(k) plans

• Other qualified retirement plans

These plans can provide opportunities to save significant amounts for retirement while potentially creating business or individual tax benefits, depending on the structure of the plan.

For example, SEP contributions are generally employer contributions, while SIMPLE IRA plans can allow employee salary-reduction contributions.

The right retirement plan can depend on your business structure, income, cash flow, employees, and retirement goals.

This is an area where coordinating your tax strategy with a qualified financial planner can be particularly valuable.

Don't Forget About the Saver's Credit

For certain taxpayers, retirement contributions may also play a role in qualifying for the Retirement Savings Contributions Credit, commonly known as the Saver's Credit.

Eligibility depends on factors including income and filing status.

Because the credit has specific requirements and income limitations, it is important to review your circumstances rather than assuming that making a retirement contribution automatically qualifies you.

A Few Retirement Contribution Mistakes to Avoid

Retirement accounts can provide significant tax advantages, but there are also rules you need to follow.

1. Don't exceed contribution limits

Employer-sponsored retirement plans have annual contribution limits.

Contributing more than the allowable amount can create additional tax reporting and correction requirements.

2. Understand IRA deductibility

Making a traditional IRA contribution does not automatically mean you can deduct the entire contribution.

Income and employer-plan participation can affect your deduction.

3. Keep track of nondeductible IRA contributions

If you make a nondeductible traditional IRA contribution, keep accurate records.

You may need to report the contribution and track your IRA basis so that you aren't taxed twice when money is eventually distributed. Track this on Form 8606 to know how much of your traditional IRA contributions were after-tax instead of before-tax.

4. Don't assume Roth is "better" or traditional is "better"

The biggest question isn't simply, "Which account saves me the most taxes this year?"

Instead, consider:

Would I rather receive a potential tax benefit today, or potentially receive tax-free retirement income later?

That is a tax-planning question—not just a tax-preparation question.

Your Tax Return Can Tell You More Than What You Owe

One of the benefits of reviewing your tax return carefully is that it can highlight opportunities for future planning.

For example, your return may help identify:

• Whether additional retirement contributions could have provided a tax benefit

• Whether you may qualify for a traditional IRA deduction

• Whether Roth contributions may make sense as part of your long-term strategy

• Whether you may qualify for the Saver's Credit

• How your income affects retirement contribution options

• Opportunities for small-business retirement planning

These decisions are often easier to make before the end of the tax year rather than after the tax return is already filed.

Your Tax-Season Retirement Checklist

As you prepare for tax season, consider these questions:

☐ Do I contribute to a traditional 401(k), 403(b), or similar employer plan?

☐ Am I contributing enough to receive my full employer match?

☐ Did I make a traditional IRA contribution?

☐ Is my traditional IRA contribution deductible?

☐ Did I make a Roth IRA contribution?

☐ Does my employer offer a Roth 401(k)?

☐ Am I self-employed or a small-business owner who should consider a SEP, SIMPLE, or other retirement plan?

☐ Did I make any nondeductible IRA contributions that need to be tracked?

☐ Could I qualify for the Saver's Credit?

☐ Should I review my retirement contribution strategy before the end of the year?

Tax Preparation Is Only Part of the Picture

At Ultiemily Advisory Services, our goal is to help businesses and individuals understand how their financial decisions affect their tax situation.

Retirement contributions are just one piece of the bigger picture. Your income, deductions, business

structure, retirement savings, and other financial decisions can all interact with one another.

The goal isn't simply to reduce your tax bill today. It's to make tax decisions that fit your overall financial strategy.

If you are unsure whether your current retirement strategy is providing the tax benefits you expect, it may be worth reviewing your situation with your tax professional and, when appropriate, a qualified financial planner.

Ready to Make Your Tax Strategy Work for You?

Don't wait until the last minute to think about tax planning.

Ultiemily Advisory Services provides tax preparation, bookkeeping, payroll, and advisory services for individuals, businesses, and nonprofits.

Let's review where you are today and identify opportunities to plan for tomorrow.

Book a consultation with Ultiemily Advisory Services to get started.

Retirement Plan	2026 Contribution Limit	Age 50+ Catch-Up	Age 60–63 Catch-Up
401(k), 403(b), Governmental 457(b)	$24,500	+$8,000	+$11,250
Traditional & Roth IRA	$7,500	+$1,100	—
SIMPLE IRA	$17,000	+$4,000	+$5,250
SEP IRA	Lesser of 25% of compensation or $72,000	N/A	N/A
Defined Contribution Plans – Overall Limit	$72,000	See applicable catch-up rules	See applicable catch-up rules