This article will:
- Explain why a strong retirement plan is built on consistent retirement savings and how small, steady contributions can make a meaningful long‑term impact.
- Break down the benefits of making a pretax contribution, including how it can help lower taxable income while you’re still working.
- Highlight incentives like the Saver’s Credit that may help eligible individuals boost retirement savings and get more value from their retirement strategy.
Your retirement plan can be much more than a tool for the future. It can also play an important role in your financial life today. By contributing to your employer-sponsored retirement plan, you can build long-term retirement savings while potentially lowering your taxable income now. Through pretax contributions and possible tax credits, a retirement plan helps you keep more of what you earn while staying focused on your future goals.
How your retirement plan can help lower your current taxes
When you contribute to your retirement plan, those dollars are often invested as a pretax contribution. That means the money is deducted from your paycheck before income taxes are calculated. As a result, your taxable income is reduced, which may lower your federal, and possibly state, income taxes. In simple terms, contributing to your retirement plan can help you save for tomorrow while keeping more money in your pocket today.
Understanding the benefits of pretax savings
Consider this example. If you earn $50,000 per year and contribute $5,000 to your retirement plan, that pretax contribution reduces your taxable income to $45,000. Taxes are calculated on the lower amount, which can reduce your overall tax bill. If you saved the same $5,000 in an aftertax account, your taxable income would remain $50,000 and you would likely pay more in taxes.
This is one of the key advantages of using a retirement plan as part of your financial planning strategy. Pretax contributions help boost retirement savings while offering the potential benefit of lower taxable income in the present.
Here’s a hypothetical example of pretax vs. after-tax savings
The example below assumes a 10% savings rate and a 25% federal income tax rate.
This example only considers federal income taxes and doesn’t consider state or local taxes or other payroll adjustments. Withdrawals made prior to age 59½ may be subject to a 10% federal income tax penalty and are subject to plan restrictions. This example also assumes that all income is taxed at an average rate of 25%, whereas federal tax rates increase gradually as taxable income rises over specified levels.
The more you contribute, the more you can save
Increasing your contribution rate can further amplify these benefits. As your pretax contribution increases, your taxable income may decrease even more. Over time, this approach can strengthen your retirement savings and increase the impact of tax advantages built into your retirement plan. Small contribution increases today can make a meaningful difference over the long term.
Planning for taxes in retirement
Pretax contributions and any investment growth are not taxed until withdrawals are made in retirement. While future tax rates cannot be predicted, many individuals expect to be in a lower tax bracket once they stop working. If that happens, you may owe less in taxes on the money you withdraw, making your retirement savings even more efficient.
The Saver’s Credit could help you save even more
In addition to lowering taxable income, your retirement plan may also help you qualify for the Saver’s Credit. This credit is designed for individuals and families with low to moderate income who are actively saving for retirement. Depending on your adjusted gross income, the credit can equal 10%, 20%, or even 50% of your contributions, up to certain limits.
The Saver’s Credit can reduce your tax bill directly, making retirement savings even more impactful. Your Equitable Advisors Financial Professional can help you understand eligibility rules and determine whether this credit may apply to your situation.
Important note: At Equitable, we believe education is a key step toward addressing your financial goals, and we’ve designed this material to serve simply as an informational and educational resource. Accordingly, this article does not offer or constitute investment advice and makes no direct or indirect recommendation of any particular product or of the appropriateness of any particular investment-related option. Investing involves risk, including loss of principal invested. Your needs, goals and circumstances are unique, and they require the individualized attention of your financial professional. But for now, take some time just to learn more.
This article is provided for your informational purposes only. Please be advised this document is not intended as legal or tax advice. Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor.
Equitable Financial Life Insurance Company (NY, NY) issues life insurance and annuity products. Securities offered through Equitable Advisors, LLC, member FINRA, SIPC. Equitable Financial Life Insurance Company and Equitable Advisors are affiliated and do not provide tax or legal advice.
GE-8880346.1 (04/2026) (Exp. 04/2030)
