I have a question about how my 401(k) contribution affects my return. Can you help me understand how the contribution changes my tax due/refunded?

[MichaelL1 · Accepted solution]

Your 401K contribution reduces the taxable wages on your return.  Box 12 of your W-2 will have a code of D and dollar amount.  This is for a Traditional 401K contribution. A contribution to to a Roth 401K is NOT deductible and does not reduce your taxes (however is not taxed when you later retire and withdraw from the Roth).

For example if I was in the 25% federal tax bracket and had a $2,500 contribution during 2016 to a Traditional 401K, I would save $625 ($2,500 X 25%) on my Federal Taxes and probably more if I have a state return.  

Look at page 14 of this link to check what tax rate you are in.  https://www.irs.gov/pub/irs-pdf/i1040tt.pdf

A 401K or other retirement account is an excellent method to save for retirement.  

Note:  Due to possible other items on your return it may not come to exactly 25% in my example above.