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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-

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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.

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Traditional 401(k) Contribution Example

Yearly wages = $20,000
Yearly 401(k) Contribution = $2,000 
At the end of the year you will only be responsible to pay federal taxes on $18,000.

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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