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You have two options for the 401(k) contributions that are deducted directly from your paycheck, traditional and roth.
Traditional “Pre-tax” Contributions
The money you invest in the Traditional 401(k) plan (from your monthly paychecks) is not taxed by the government at this time.
You will pay taxes on this invested money (plus any interest you make on that money) when you withdraw the funds at retirement.
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Traditional 401(k) Contribution Example Yearly wages = $20,000 |
Roth “After-Tax” Contributions
This option does not reduce your taxable earnings for the year. With this type of contribution you pay taxes on the money now (even though it gets directly deposited into your 401(k) account). However, when you withdraw these funds at retirement, your invested money (plus the interest earned) is not taxed.
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Roth 401(k) Contribution Example Year wages = $20,000 However, if that grows with interest to $100,000 over 35 years you will not owe taxes when you withdraw it. |
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Roth tax savings do not apply to the employer match and interest earned on the match. |
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