What are the long-term benefits of pre-tax contributions?
When you contribute to your 401(k) account, the money comes out of your paycheck before federal and most states’ income taxes are assessed. This means that you will pay lower income taxes than you would have paid if you had not contributed to your 401(k) plan during the year. Your contributions are invested and start earning interest and capital gains on a tax-deferred basis. When you start withdrawing money from your account, usually at retirement when you may be in a lower tax bracket, you will pay regular income taxes on the contributions and earnings you withdraw.
