You can contribute up to $17,500 to your 401(k) each year as of 2014, according to the IRS. These options can include company stock, mutual funds and, for some companies, a brokerage account where you get to pick individual stocks and bonds on your own. You will have at least three, according to the Financial Industry Regulatory Authority, but you may have many more, especially if you work for a larger company. Your company decides the investment options available to you after you put your money in the 401(k). But when you take your qualified withdrawals in retirement, you won't have to pay any taxes. A Roth 401(k), on the other hand, won't reduce your taxable income just by contributing. But, your withdrawals from a traditional 401(k) count as taxable income. For example, if you defer $2,000 into your 401(k), your taxable income on your W-2 at the end of the year will be $2,000 less, which makes it function like a tax deduction.
With a traditional 401(k), the money you put into the account doesn't count as taxable income. Using a 401(k) for your retirement savings increases the growth of your nest egg because no matter what type of 401(k) you use, the money grows without being taxed.Ī 401(k) may offer two ways to save.
A 401(k) offers tax breaks for diligently saving for retirement, according to the Internal Revenue Service, but isn't the easiest account to withdraw from if you need money before you retire. A 401(k) is a retirement savings account offered by for-profit employers to help their employees save for retirement.