Pretax contributions
Traditional employee contributions generally reduce current federal taxable wages, although they are typically still subject to Social Security and Medicare taxes.
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Understand pretax contributions, tax-deferred investment growth, employer matching, withdrawal rules, and the role a traditional 401(k) may play in retirement planning.
A traditional 401(k) is an employer-sponsored retirement savings plan that generally lets eligible employees contribute part of their pay before federal income tax. Investments can grow tax-deferred, and distributions are generally taxable when taken out. Employer contributions may also be available under the plan's rules.
Traditional employee contributions generally reduce current federal taxable wages, although they are typically still subject to Social Security and Medicare taxes.
Investment earnings generally are not taxed each year inside the account. Tax is typically assessed when taxable distributions are made.
Your employer may contribute based on a matching formula or other plan terms. Eligibility and vesting rules determine what you receive and keep.
The tax benefit is generally a deferral, not a permanent exemption. Most taxable distributions from a traditional 401(k) are included in ordinary income. Additional taxes may apply to certain early distributions.
| Stage | What generally happens | What to check |
|---|---|---|
| Enrollment | You enroll or are enrolled according to your employer's plan and choose, or confirm, your contribution rate. | Eligibility, automatic enrollment, opt-out rules, and enrollment deadlines. |
| Contributions | Traditional employee contributions are generally deducted from pay before federal income tax is calculated. | Annual IRS limits, payroll deductions, and employer match terms. |
| Investing | Your account is invested in the options available under the plan, according to your selections or default investment arrangement. | Investment risk, diversification, expense ratios, and plan fees. |
| Changing jobs | You may have options for retaining the account, rolling eligible funds over, or taking a distribution. | Vesting, account balance rules, rollover procedures, and potential taxes. |
| Withdrawals | Taxable distributions are generally included in ordinary income. Some early distributions may face an additional tax. | Distribution eligibility, exceptions, withholding, and required minimum distributions. |
The main difference is when tax is generally paid. Traditional contributions generally receive pretax treatment, while designated Roth 401(k) contributions are made after tax. Which option may be appropriate depends on your circumstances and plan features.
| Feature | Traditional 401(k) | Roth 401(k) |
|---|---|---|
| Employee contributions | Generally made before federal income tax. | Made after tax. |
| Current federal taxable income | Traditional contributions generally reduce current federal taxable wages. | Contributions generally do not reduce current federal taxable income. |
| Investment growth | Generally tax-deferred within the account. | Generally grows without current annual taxation within the account. |
| Withdrawals | Taxable distributions are generally ordinary income. | Qualified distributions are generally tax-free; nonqualified distributions may have different treatment. |
| Potential consideration | May appeal to people seeking a current-year tax deduction or deferral. | May appeal to people who prefer paying tax on contributions now in exchange for potential qualified tax-free withdrawals later. |
Some plans offer both options. This comparison is general information, not a prediction of which option will produce a lower lifetime tax bill.
Estimate how much you could contribute over a year based on your salary and contribution rate. This tool does not determine eligibility, employer matching, take-home pay, or whether you are within the current annual IRS limit.
Enter your salary and the percentage of pay you plan to contribute.
Employer contributions are illustrative only and may be limited by matching formulas, eligible compensation, vesting, and plan rules. This estimator does not check current IRS limits or catch-up contribution eligibility.
Traditional employee contributions generally reduce current federal taxable wages, subject to the applicable rules.
Regular contributions and investment growth may help build retirement assets, although investment returns are not guaranteed.
Taxable withdrawals add to income in the years they occur. Your future tax circumstances may differ from today's.
Traditional employee contributions are generally made before federal income tax and reduce current federal taxable wages. They are not usually claimed as a separate deduction on your individual tax return. Social Security and Medicare taxes generally still apply to salary deferrals.
Investment earnings generally grow tax-deferred inside the account. Taxable distributions are typically included in ordinary income when withdrawn, subject to the rules that apply to the distribution.
Many plans offer matching contributions or other employer contributions. The formula, eligibility conditions, and vesting schedule depend on the plan. Review the plan documents to understand the benefit available to you.
Depending on the plan and your balance, you may be able to leave the money in the old plan, roll eligible funds into another eligible retirement account, or take a distribution. Cashing out can create taxes and potentially an additional early-distribution tax.
Some distributions may be available before age 59½ depending on the plan and circumstances. Taxable distributions may be subject to ordinary income tax and an additional 10% federal tax unless an exception applies.
Neither is universally better. Traditional contributions generally provide a current tax deferral, while Roth contributions are made after tax and may offer tax-free qualified withdrawals. Compare your present and potential future tax circumstances, cash flow, and plan options.
Required minimum distribution rules may apply based on your age, birth date, employment status, account type, and current law. Certain plan-specific rules and exceptions can affect timing.
Use official IRS guidance to check current retirement plan contribution, tax, and distribution rules.
Find information about employer-sponsored retirement benefits and plan participant protections.
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