Any 401K plan that your employer provides is a retirement mechanism that allows all eligible employees the ability to make yearly contributions. These contributions are then matched by the employer depending on the specific rules set up within the plan. At plan maturity or upon leaving the company, these accumulated contributions and matches are then distributed to the owner. They are usually then rolled over into another investment vehicle so that they will not incur any penalties.
Are The 401K Contributions Tax Deductible:
The answer is yes. These contributions are from pre-tax income and are taken from the employee's payroll check. This reduces the amount of taxable income that the employee now has making their taxes less. These pre-tax dollars are then placed into the plan and interest is accrued tax free until maturity or withdrawal. Even if you are someone who does not participate in a company sponsored 401K, but have one of your own then your contributions are tax deductible. There are limits as to the amount of tax deductible contributions that can be made to a 401K plan and are stated either by the government and/or the company itself.
Does Tax Deductible Mean Tax Exempt In A 401K:
The answer here is no. Even though the contributions that you make to the 401K plan are tax deductible, they are only tax deferred until retirement or unless rolled over into another tax deferred plan. At the time of retirement you are then taxed at your current tax rate on the distribution that is taken out. There will also be penalties assessed along with those taxes if you are withdrawing before age 59 1/2. Taxing at the end of the plan can be very beneficial for those who have a higher tax bracket now compared to what they will have at retirement time.