Since its debut nearly 40 years ago, the 401(k) has emerged as one of the premier tools to save for retirement in America. In fact, when we poll 401(k) participants across the country, the majority of them consistently say it’s their largest — or only — source of retirement savings.*
One of the main reasons 401(k) accounts are so popular and effective is their tax treatment. A traditional 401(k) is funded from your pretax paycheck, so the money you put into your plan, and any potential gains on your investments, are not taxed until you ultimately withdraw the money. Importantly, contributions lower your taxable income, and contributing enough could even move you into a lower tax bracket in a given year.
The flip side is that when you eventually withdraw money from a traditional 401(k) in retirement, those withdrawals are subject to ordinary income tax. That’s why it’s referred to as a “tax-deferred” vehicle — taxes are deferred until you begin to take the cash out.
