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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
Yearly 401(k) Contribution = $2,000
Your federal tax bracket would be based on taxable earnings of $18,000 for the year. At the end of the year
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when you file your taxes, your federal taxable income would be $18,000.
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Traditional 401(k) contributions save you money on your taxes now. The amount you contribute from your paychecks as Tradiditional 401(k) contributions reduce your federal tax bracket and liability right now. Traditional 401(k) contributions may be a good fit for:
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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
Yearly 401(k) Contribution = $2,000
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Your federal tax bracket would be based on taxable earnings of $20,000 for the year.
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 401(k) contributions save you money on your taxes when you retire and start withdrawing the retirement funds. The amount you contribute from your paychecks as Roth 401(k) contributions do NOT reduce your federal tax bracket and liabilitynowliability now. However However, when you withdraw the funds in retirement you do not have to pay Federal federal taxes on the Roth amounts you contributed to the 401(k) plus you don't have to pay Federal federal taxes on any interest you withdraw/earned from those Roth contributions. Roth Roth 401(k) contributions may be a good fit for:
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Roth tax savings do not apply to the employer match and interest earned on the match. If you want to convert your employer match to Roth see Roth Conversion Form or Roth Transfer Form |
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