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What is a Traditional 401(k)?

Traditional 401(k)

  • Contributions are made before taxes are paid, also known as pre-tax contributions or tax-deferred.
  • When a worker receives their W-2, their earned income will be lower because contributions for a traditional 401(k) are deducted from their pay.
  • This decreases the worker's taxable income now and they will pay taxes when they withdraw the 401( k ) money.
  • If the worker's contributions are the same, their take home pay will be slightly higher when compared to a Roth.

How Money is Taxed

See the example below of how and when money is taxed.

These are sample numbers for easy math, assuming the tax rate is 10% and the contribution rate is 10%.

Traditional Pay Flow Traditional
Gross Pay $2000
Pre-Tax Contribution (10%) $200
Taxable Income $1800
Taxes (10%) $180
Take home pay $1620
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