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A 401(k) can help you save on income taxes

With President Trump’s tax proposals taking aim at many deductions now used by Americans to lower their tax bills, the 401(k) retirement account is re-emerging as a go-to vehicle to shield one’s earnings from the IRS.

The IRS said Thursday it is upping the maximum 401(k) contribution for 2018 by $500 to $18,500. That makes the 401(k) an even better tax shelter.

Trump’s tax proposal would eliminate the state and local tax deduction that people mainly living in states with high taxes relied on to lower their taxable income by itemizing deductions on their tax return rather than taking the standard deduction. And while Trump’s proposal leaves the mortgage interest deduction intact, fewer people likely will use it because his tax reform plan would also double taxpayers standard deduction — or the amount that’s subtracted from incomes before the tax rate is applied — from $6,350 to $12,000 for individual filers and from $12,700 to

$24,000 for married couples. So how can your 401(k) save you on taxes? By maxing out pretax 401(k) savings at $18,500 next year, a dual-income married couple can reduce their taxable income by $37,000. At the 25% tax bracket, one of three proposed by Trump, that equates to a rough estimate of $9,250 in tax savings.

The bottom line: the more you save in your 401(k) the more you save on your taxes. If there’s a way for families to max out their

401(k)s without breaking the budget, now’s the time to do it.