Tax Benefits: When you contribute to your company’s traditional 401(k) plan, your contributions come out of your pre-tax income, lowering your taxable income and reducing your tax bill. The money you invest can also grow without being taxed immediately, a concept known as tax-deferred compounding. Our chart illustrates the difference in taxes and take-home pay between a 401(k) plan and a regular savings account.

Tax-Deferred Growth: Consider the chart on the right, which compares the growth of $100 per month in a tax-deferred retirement account versus a taxable account. The tax-deferred account will be subject to income taxes upon withdrawal. If your employer offers a Roth 401(k), you can contribute post-tax payroll deferrals, and qualified plan withdrawals are tax-free in retirement. Your summary plan description will specify this option. To determine your savings goals and how much you can contribute, consult with a financial advisor. You can adjust your deferral amount throughout the year as needed.