The 401k deduction for taxes that is often discussed is not actually a tax deduction, it actually just puts a hold on paying taxes on the money you invest until you withdraw during retirement.
This is a helpful tactic though, and one that will help you grow your retirement savings considerably.
A traditional plan is done through your employer.
The money you invest is taken from your checks before taxes are taken out of your income.
The money you invest will earn returns and grow a great deal over the years.
When you withdraw money in retirement the money you invested will be taxed, though the profit earned on the investments is exempted.
When you originally put money into your plan the money that is taken before taxes is not considered taxable income until retirement.
This means that the money you put into your plan gives you a 401K deduction for that year, hopefully lowering your income bracket and then lowering the percentage of taxes you have to pay that year.
While this isn't a real tax deduction, because you will still have to pay the taxes when you withdraw in retirement, it does put off paying taxes on that income until then, and allow you to invest that money and help you grow your retirement savings.
The maximum amount of money you are allowed to invest in your traditional pre-tax plan changes every year.
The government changes this amount based on the annual inflation rate and other factors.
As of 2009 you are allowed to contribute up to $16,500 with a $5,000 catch-up contribution for those over the age of 50.
Even if you aren't contributing to the maximum to your plan every bit you do contribute helps, and depending on your income bracket you may be able to lower your tax level without having to contribute that much.
Before making any investment plans based on your tax needs it is recommended that you speak with your tax professional about your specific income needs, they can help you plan not just for your current tax requirements, but for your obligations in retirement as well.
As a strategy for lowering your income bracket, and raising your retirement savings in more ways than one, the 401k deduction is definitely information that more people should be made aware of, and discuss with their financial professionals.