Tax Planning is the process of analyzing an individual's current financial situation or that individual's current financial plan to make sure that all of the components are working together to ensure that they are legally paying the lowest possible amount in taxes. Tax planning is a very important aspect of an individual's financial plan as minimizing the amount one pays for taxes and maximizing the amount of money one can put into their retirement plan is crucial to long-term financial success. The key to reducing one's tax liability is to lower the amount of one's gross income that is subject to taxes. One of the best tools to achieve this is contributing a higher amount of your pretax dollars into your retirement savings like a traditional IRA or a 401(k). Contributing to a traditional IRA or a 401(k) can reduce your taxable income by the amount invested, allowing that invested amount of your annual income to grow tax-deferred until retirement. Though using a traditional IRA reduces your taxable income in the same way as a 401(k), investing in a 401(k) offers the additional advantage that the contribution limit dollar amount is much greater therefore you can put more money away to grow tax-deferred and lower your adjusted gross income by a greater amount.