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Many 401(k) plans have a matching incentive where an employer will match funds that their employees contribute to the 401(k) plan. The matching incentive is designed to motivate employees to contribute funds to the retirement savings plan. |
Traditional vs. Roth Contributions
You have 2 choices for the portion of the 401(k) contribution that that’s deducted directly from your paycheck.
Traditional “Pre-tax” 401(k) 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 $) when you withdraw the funds at retirement.
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Traditional 401k Contribution Example Year wages = $20,000 |
Roth “After-Tax” 401(k) 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 401k 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. |
Getting Started Saving for Retirement
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You can also select a Principal Lifetime Fund that will select the investments for you, and will invest your $ in investment options that have appropriate risk and diversity based on your expected retirement date.
Traditional vs. Roth
You have 2 choices for the portion of the 401(k) contribution that that’s deducted directly from your paycheck.
Traditional “Pre-tax” 401(k) 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 $) when you withdraw the funds at retirement.
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Traditional 401k Contribution Example Year wages = $20,000 |
