What is a Traditional 401(k)?
Traditional 401(k)
-
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 |
| Gross Pay |
$ 2000 |
| Pre-Tax Contribution (10%) |
$200 |
| Taxable Income |
$ 1800 |
| Taxes (10%) |
$180 |
| Take home pay |
$ 1620 |