In the meantime, the money in the account can compound without being taxed. In addition, the money you contribute to a 401(k) and then invest can grow tax-deferred, meaning you don't pay taxes on it until you withdraw it in retirement. That means your total taxable income for the year would be $90,000, reducing the amount you have to pay taxes on that year. Let's say you earn $100,000 per year and contribute $10,000 to your 401(k). With a traditional 401(k), the amount you contribute is deducted from your taxable income. When you sign up for a 401(k), you'll set an amount or percentage to be automatically taken out of each paycheck to fund the account. Tax advantages are one of the main benefits of contributing to a 401(k). It's called a 401(k) because of the section of the IRS code that sets out the rules for this type of account, section 401, subsection k.īasically, the government allows companies to offer retirement savings accounts with certain tax advantages in an effort to encourage people to save for retirement. So, what is a 401(k), and how does it work? We'll look at three main concepts: contributions, investments, and account management.īut first, let's start with the absolute basics: the name. Narrator: One of the most common ways people save for retirement is by contributing to a 401(k), a retirement savings account offered by many employers. Environmental, Social and Governance (ESG) Investing.Bond Funds, Bond ETFs, and Preferred Securities. ![]()
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