How Does a 401(k) Get Taxed ?
A 401(k) plan is a retirement plan set up by employers to which employees contribute some of their earnings pre-tax for retirement. Many employers also match their employees’ contributions. Tax Savings and Tax Deferment The main feature of a 401(k) plan is that you are making contributions with pretax dollars, which results in tax savings for just putting away money for retirement. Your contributions are therefore tax free. For example, if you earn $50,000 and are taxed at 28%, at the end of the year, you will owe $14,000. if you contribute $5000 to your 401(k), your taxable income is now considered $45,000 and you will now owe $12,600 in taxes – saving $1400 in tax just for contributing to your retirement. The earnings on your 401(k) are also tax-deferred, which means your nest egg can grow tax-free, and you don’t pay any taxes until you start making withdrawals. Taxation Upon Approved Withdrawals Once you have reached age 59 1/2 you are allowed to start withdrawing from your 401(k),
