A traditional 401(k) contribution lowers your federal taxable income dollar for dollar — but your paycheck does not drop by the full contribution amount because the income tax savings partially offset the reduction. At $70,000 salary with a 6% contribution ($4,200/year), your annual take-home pay falls by about $3,346, not $4,200 — because you save roughly $854 in federal income taxes. For 2026, the elective contribution limit is $24,500 (under 50), $32,500 (ages 50–59 and 64+), or $35,750 (ages 60–63) (IRS Notice 2025-67; IRS IR-2025-111).
Use the 401(k) paycheck calculator to see the exact impact of any contribution rate on your salary and filing status.
How Traditional 401(k) Contributions Are Taxed
Traditional 401(k) contributions are made pre-tax: deducted from gross pay before federal income tax (and most state income taxes) are calculated. They do not reduce FICA wages — Social Security and Medicare still apply to the full gross before the contribution.
| Tax Type | Reduced by Traditional 401(k)? |
|---|---|
| Federal income tax | Yes |
| Most state income taxes | Yes |
| Social Security (6.2%) | No |
| Medicare (1.45%) | No |
This is the key difference from Section 125 pre-tax benefits (health insurance, HSA, FSA), which reduce both income tax and FICA wages. See HSA and FSA paycheck savings.
2026 Contribution Limits
| Age | Elective Limit | Catch-Up | Total Limit |
|---|---|---|---|
| Under 50 | $24,500 | — | $24,500 |
| 50–59 | $24,500 | $8,000 | $32,500 |
| 60–63 | $24,500 | $11,250 (SECURE 2.0) | $35,750 |
| 64 | $24,500 | $8,000 | $32,500 |
| 65+ | $24,500 | $8,000 | $32,500 |
The super catch-up for ages 60–63 remained at $11,250 for 2026. The regular catch-up for those 50+ increased from $7,500 to $8,000. The limit applies to the combined total of traditional and Roth 401(k) elective deferrals.
Worked Example: $70,000 Salary, 6% Contribution
Single filer, biweekly payroll, no state income tax, no other deductions. Numbers verified with the tax engine.
| No 401(k) | 6% Traditional ($4,200/yr) | |
|---|---|---|
| Annual gross | $70,000 | $70,000 |
| 401(k) contribution | $0 | $4,200 |
| Federal taxable wages | $53,900 (after std deduction) | $49,700 (after std deduction) |
| Federal income tax | $6,570 | $5,716 |
| FICA (7.65% on $70,000) | $5,355 | $5,355 |
| Annual take-home | $58,075 | $54,729 |
| Reduction in take-home | — | $3,346 |
| Per-biweekly-paycheck change | — | −$129 |
You contribute $4,200 per year ($162/biweekly) but take-home drops by only $3,346 ($129/biweekly) because income tax savings of $854 offset part of the contribution.
Effective cost of the contribution: $3,346 ÷ $4,200 = 80 cents per dollar contributed.
Note: the savings is not a flat 22% of $4,200 because the first $3,500 of the contribution removes income from the 22% bracket ($770 savings) and the remaining $700 removes income from the 12% bracket ($84 savings), totaling $854.
Paycheck Reduction at Different Contribution Rates
| 401(k) Rate | Annual Contribution | Annual Tax Savings | Net Paycheck Reduction | Per Biweekly Period |
|---|---|---|---|---|
| 3% | $2,100 | $462 | $1,638 | $63 |
| 6% | $4,200 | $854 | $3,346 | $129 |
| 10% | $7,000 | $1,190 | $5,810 | $223 |
| 15% | $10,500 | $1,610 | $8,890 | $342 |
| Max ($24,500) | $24,500 | $3,290 | $21,210 | $816 |
Assumes $70,000 salary, single filer, standard deduction, no state tax. Tax savings vary because bracket rates differ across income levels.
At higher contribution rates, as income crosses into lower brackets, the per-dollar savings decreases. The max contribution saves only $3,290 (not 22% of $24,500 = $5,390) because much of it moves income from the 12% and then 10% brackets.
The Employer Match: Free Money First
If your employer matches contributions — for example, 100% of the first 3% of salary — the match is separate from your limit and immediately improves the return on saving.
Example: $70,000 salary, 6% contribution, employer matches 100% up to 3%.
| Source | Annual Amount |
|---|---|
| Your contribution | $4,200 |
| Employer match (3% = $2,100) | $2,100 |
| Total to retirement account | $6,300 |
| Your net paycheck cost | $3,346 |
You spend $3,346 in reduced take-home pay, and your account receives $6,300 — a near-doubling before any investment returns, because the match and tax savings combine. Contributing at least enough to capture the full match is almost always the highest-return financial move available to a W-2 employee.
401(k) and Your Annual Tax Return
At filing, traditional 401(k) contributions do not need to be reported separately. They are already excluded from Box 1 (wages) on your W-2. Your W-2 Box 12 with code D shows the amount contributed for your records. No extra forms are required unless you over-contributed (excess deferrals must be withdrawn by April 15 of the following year).
For a Roth vs. traditional comparison — including which to choose at different income levels — see Roth vs. traditional 401(k) paycheck.