Are 401(k) contributions tax-free?

Your 401 (k) contributions are put in before taxes have been paid, and they grow tax-free until you take them out. When you take distributions, the money you take each year will be taxed as ordinary income. A Roth 401 (k) or traditional 401 (k) may be a better option if you’d prefer to pay taxes now and enjoy tax-free distributions at retirement.

Does a 401(k) pay taxes?

One of the most appealing things about a 401 (k) is that you’ll pay 401 (k) tax when you take the money out, not when it goes in. That means money that’s taken out of your paycheck this week will go into your retirement savings account before taxes have been withheld. It’s a great way to save a little on taxes now.

Are 401(k) distributions taxed?

Traditionally, 401 (k) distributions are taxed as ordinary income. However, the tax burden you’ll incur varies by the type of account you have—a traditional 401 (k) or a Roth 401 (k) —and by when you withdraw funds from your account. The tax treatment of 401 (k) distributions depends on the type of account: traditional or Roth.