401(k) Overview

Taxes

Tax deferment is the main reason individuals opt into a 401(k) plan. The basic premise is that all contributions to your 401(k), whether they are from your own pre-tax dollars or a company match, are not taxed when they go into the retirement account. Then, upon retirement, you pay tax on the withdrawn income based on the income tax bracket it placed you into. Additionally, any contributions made to your 401(k) can be deducted from your tax liability in that fiscal year. This can potentially take you and your family into a lower tax bracket, which means less of each dollar you earn must be paid in tax. There is some risk involved with delaying payment of tax as there is the uncertainty of what the income tax bracket rates will be a few decades down the road. This is because withdrawals from a 401(k) will be subject to future and possibly unknown tax rates. Assuming tax rates remain relatively stable, however, a 401(k) is highly advantageous to all employees to whom it is offered.

Continue reading to learn about employer contributions to 401(k) plans.