- 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|
|Pre-Tax Contribution (10%)||$200|
|Take home pay||$1620|