Does AGI Include 401k Contributions?
See how your 401(k) plan impacts your AGI. Understanding the difference in contribution types can help you manage your taxable income for the year.
Adjusted Gross Income (AGI) is a figure on your annual tax return that influences eligibility for various deductions and credits. The way your 401(k) retirement plan contributions and distributions interact with this number is a common point of confusion and can directly impact your tax liability.
Understanding AGI and Gross Income
Gross income is the starting point for your taxes and includes all income you receive during the year, such as wages, salaries, bonuses, dividends, interest, and rental income. From this figure, certain “above-the-line” deductions are subtracted to arrive at your AGI. These deductions are taken before the line on Form 1040 that shows your AGI.
Common examples include deductions for student loan interest, contributions to a traditional Individual Retirement Arrangement (IRA), and certain business expenses. The IRS uses your AGI to determine eligibility for many tax benefits and to calculate your final taxable income.
How 401(k) Contributions Affect AGI
The interaction between your 401(k) contributions and your AGI depends on the type of contribution you make. This distinction directly impacts your taxable income for the year.
Traditional 401(k) Contributions
When you contribute to a traditional 401(k), those contributions are made with pre-tax dollars, meaning the money is taken from your paycheck before federal income taxes are calculated. As a result, these contributions reduce your gross income, which in turn lowers your AGI for the year. For example, if your annual salary is $70,000 and you contribute $7,000, your AGI will be calculated based on an income of $63,000, assuming no other adjustments.
Roth 401(k) Contributions
In contrast, contributions to a Roth 401(k) are made with post-tax dollars, meaning you have already paid income tax on the money before it goes into your retirement account. Because the tax has been paid, these contributions do not reduce your gross income and therefore have no effect on your AGI for the current tax year.
Employer Contributions
Many employers offer a matching or profit-sharing contribution to their employees’ 401(k) plans. These employer contributions are not included in your income for the year and do not increase your gross income or your AGI. The tax on these funds and any investment earnings is deferred until you withdraw the money in retirement.
401(k) Distributions and AGI
The tax treatment of money taken out of a 401(k) plan, known as a distribution, also directly impacts your AGI. The rules for distributions mirror the initial contribution type, determining whether the withdrawn funds are considered taxable income.
Traditional 401(k) Distributions
Since contributions to a traditional 401(k) are made pre-tax, distributions you take in retirement are considered taxable income. These withdrawals, including both your contributions and any investment earnings, are added to your other income sources for the year to calculate your AGI. Taking a large distribution in a single year can significantly increase your AGI and potentially move you into a higher tax bracket.
Qualified Roth 401(k) Distributions
Withdrawals from a Roth 401(k) receive the opposite treatment. Provided the distribution is “qualified,” it is entirely tax-free and is not included in your AGI. For a distribution to be qualified, the account must have been open for at least five years, and you must be at least 59½ years old, disabled, or the distribution must be made to a beneficiary after your death.
Locating 401(k) Information on Tax Forms
Your tax documents show how your 401(k) affects your AGI calculation.
Form W-2
Your employer-issued Form W-2 contains the necessary details about your 401(k) contributions. Box 1 reports your “Wages, tips, other compensation,” and this amount has already been reduced by any traditional 401(k) contributions you made. Box 12 shows the specific amount of your contributions, using code D for a traditional 401(k) and code AA for designated Roth contributions.
Form 1040
The income figure from Box 1 of your W-2 is carried over to Line 1a of your Form 1040. Because traditional 401(k) contributions have already been excluded from the W-2 Box 1 amount, they are effectively subtracted before your AGI is calculated on the 1040.