A 401(k) is usually pre-tax, which means the money comes out of your paycheck before income tax is calculated

When you contribute to a traditional 401(k), your employer deducts the money from your gross pay — the amount before federal, state, and local income taxes are withheld. That means if you earn $3,000 in a pay period and contribute $300 to your 401(k), your taxable income for that period drops to $2,700. You pay income tax only on the $2,700, not the full $3,000.

This is the most common 401(k) setup. It lowers your tax bill in the year you contribute, which is why it's called "pre-tax" or "traditional." The tradeoff is that when you withdraw the money in retirement, those withdrawals are taxed as ordinary income at whatever tax rate applies then.

Some employers also offer a Roth 401(k), which works the opposite way. Roth contributions come from after-tax money — you pay income tax on it now — but withdrawals in retirement are tax-free. Not all employers offer this option, so check your plan documents or ask your benefits administrator which types your workplace plan includes.

Key Takeaways

  • Traditional 401(k) contributions reduce your taxable income in the year you contribute, lowering your current tax bill.
  • Roth 401(k) contributions use after-tax money now, but you pay no tax on withdrawals in retirement.
  • Your employer's plan may offer one, both, or neither option — check your plan summary or benefits team to see what is available.
  • You can contribute to both a traditional and Roth 401(k) in the same year, but your combined contributions cannot exceed the annual limit set by the IRS.

How pre-tax contributions lower your current tax burden

The when ready benefit of pre-tax contributions is a smaller tax bill. When you reduce your gross income, you reduce the amount subject to federal income tax, and in most states, state income tax as well. That means more of your paycheck stays in your pocket during the year, even though you are setting aside money for retirement.

The IRS sets an annual contribution limit — for 2024, the limit is $23,500 for workers under 50, and $31,000 for workers 50 and older (the extra $7,500 is called a catch-up contribution). Every dollar you contribute reduces your taxable income by that amount. If you are in the 22% federal tax bracket and contribute $10,000 to a traditional 401(k), you save roughly $2,200 in federal income tax that year.

This tax savings is real money in your pocket now, but it comes with a condition: you will owe tax on that money eventually. When you withdraw from a traditional 401(k) in retirement, the entire withdrawal — contributions plus all the growth — is taxed as ordinary income.

How Roth 401(k) contributions work differently

A Roth 401(k) is the reverse of a traditional 401(k). You contribute after-tax money, meaning you pay income tax on it in the year you contribute. Your paycheck is smaller because the contribution comes out after taxes are withheld, not before. You get no tax deduction for the contribution.

The payoff comes in retirement. When you withdraw from a Roth 401(k), the money comes out tax-free — both your contributions and all the investment growth. If your account grows from $100,000 to $250,000 over 20 years, you withdraw the full $250,000 with no tax owed.

Roth 401(k)s also have no required minimum distributions (RMDs) during your lifetime, whereas traditional 401(k)s require you to start withdrawing at age 73. This can be useful if you do not need the money and want to let it keep growing, or if you want to leave it to heirs tax-free.

Comparing the two: which makes sense when

The choice between traditional and Roth often comes down to whether you expect your tax rate to be higher or lower in retirement than it is now. If you think you will be in a lower tax bracket when you retire — because you will have less income — a traditional 401(k) makes sense: you save at a high rate now and pay at a low rate later. If you think your tax bracket will be the same or higher, a Roth may be better: you pay now at a known rate and avoid tax later.

In practice, nobody knows their future tax rate with certainty. Some people split the difference by contributing to both a traditional and a Roth 401(k) in the same year. Your combined contributions to both cannot exceed the annual IRS limit, but you can divide that limit however you want between the two account types.

High earners sometimes cannot contribute to a Roth 401(k) directly because of income limits set by the IRS, though the rules for 401(k)s are more generous than for Roth IRAs. Check your plan documents or ask your benefits team whether you are may be able to access.

What happens to your paycheck with pre-tax contributions

When you enroll in a traditional 401(k), your gross pay stays the same, but your net pay (the amount you actually receive) drops by the contribution amount. If you earn $4,000 biweekly and contribute $400 to a traditional 401(k), your paycheck is reduced by $400 before taxes are calculated. Then taxes are withheld on the remaining $3,600.

With a Roth 401(k), the math is different. Your gross pay is still $4,000, taxes are withheld on the full $4,000, and then the $400 Roth contribution comes out of what is left. Your net pay is the same in both cases, but the order of operations changes which amount is taxed.

Many employers also offer a match — they contribute money to your 401(k) based on how much you contribute. A typical match might be 50% of what you contribute, up to 6% of your salary. The employer match is always pre-tax, regardless of whether you choose traditional or Roth contributions.

Understanding required minimum distributions and early withdrawal rules

Traditional 401(k)s require you to start taking withdrawals at age 73, and the IRS calculates the minimum amount you must withdraw each year based on your age and account balance. These are called required minimum distributions (RMDs). You pay income tax on every withdrawal.

Roth 401(k)s have no RMD requirement during your lifetime, which gives you more control over when and how much you withdraw. This is one reason some people prefer Roth accounts if they do not need the money in retirement.

Both traditional and Roth 401(k)s impose a 10% penalty if you withdraw before age 59½, with limited exceptions (such as hardship withdrawals or separation from service). Traditional 401(k) withdrawals are also subject to income tax, while Roth withdrawals of contributions (not earnings) are tax-free at any age.

How to find out what your employer offers

Your employer's 401(k) plan documents — usually called the Summary Plan Description (SPD) — spell out whether you can contribute pre-tax, Roth, or both. You can request this from your benefits or human resources department, or it may be available on your company's benefits portal or intranet.

Your pay stub also shows which type of contribution is being deducted. Look for lines labeled "401(k) pre-tax" or "Roth 401(k)" to see what you are currently enrolled in. If you are not sure, your benefits team can clarify in one conversation.

If your employer does not offer a 401(k) at all, you may be able to open an individual retirement account (IRA) — either traditional or Roth — on your own. The rules and contribution limits are different from 401(k)s, but both account types exist to help you save for retirement with tax advantages.

Frequently Asked Questions

Can I switch from traditional to Roth contributions mid-year?

Yes. You can change your contribution type during the plan year, usually through your benefits portal or by contacting your benefits team. The change takes effect on your next paycheck. Money already contributed to traditional stays traditional; only new contributions go to Roth (or vice versa).

What is a Roth conversion, and is it the same as a Roth 401(k)?

No. A Roth conversion means moving money from a traditional 401(k) or IRA into a Roth account. You pay income tax on the amount converted in that year. A Roth 401(k) is a type of account you contribute to directly. They are related but different strategies.

Do I have to pay taxes on my employer match?

The employer match itself is not taxed when it is deposited, but it is treated as pre-tax money. When you withdraw it in retirement, you pay income tax on it just like your own pre-tax contributions. The match counts toward your annual contribution limit.

If I leave my job, what happens to my 401(k)?

Your money stays in the account unless you withdraw it or move it. You can roll it into a new employer's 401(k), into a traditional or Roth IRA, or leave it where it is if your balance is above the plan's minimum. Rolling into an IRA gives you more investment choices. Talk to your former employer's benefits team about your options.

Can I contribute to both a 401(k) and an IRA in the same year?

Yes, but there are limits. You can contribute to both a 401(k) and an IRA, and the contribution limits are separate. However, if you have a traditional IRA and earn above a certain income threshold, your 401(k) contributions may reduce how much you can deduct on your taxes. A tax professional can help you plan this.