401(k) Contributions refer to the amounts of money that an employee elects to defer from their salary to a 401(k) retirement savings plan. These contributions can be made on a pre-tax or after-tax (Roth) basis, depending on the plan’s provisions.
Pre-tax contributions reduce the employee’s taxable income for the year in which they are made, allowing for potential tax savings in the short term, while the funds grow tax-deferred until withdrawal. Conversely, Roth contributions are made after taxes have been deducted, allowing for tax-free withdrawals in retirement, provided certain conditions are met.
Employers may also offer matching contributions, which can enhance the total amount saved for retirement. For example, if an employee contributes 5% of their salary, the employer might match 50% of that contribution, providing an additional 2.5% to the employee’s 401(k) account.
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