Is a 401(k) Plan Tax Deductible?
Types There are two types of 401(k) plan. The traditional 401(k) plan is a retirement account that allows you to make pre-tax (tax deductible) contributions to the account. The Roth 401(k) plan is the other type of 401(k) plan available for employers to offer employees. Roth 401(k) plans only allow non-deductible contributions. In both cases, taxes are eliminated on investments inside of the 401(k) account as long as money remains in the account. Significance The significance of the tax deductible contributions allowed on a traditional 401(k) plan is that your adjusted gross income that is subject to taxation is lowered. You also pay income taxes when you withdraw money from the account during retirement. Taxes are assessed on all of the money withdrawn. The significance of a Roth 401(k) plan is that your adjusted gross income is higher than with a traditional 401(k) plan, but all withdrawals from the 401(k) plan are tax-free. Benefit The benefit of a traditional 401(k) plan is that yo
