Pre-tax contributions are deducted from your paycheck before income taxes are paid. That is to say, the contribution is made with untaxed money. The other option is an after-tax contribution, which is made with tax paid money.
In either case, the money is allowed to grow tax free in your 401(k) account until distributed in retirement, usually after age 59-1/2. If your account contains after tax contributions, a portion of each distribution is considered a refund of that money. Hence, your distribution is partially tax free. If only pretax contributions have been made, all of the distribution is taxable income. Distributions from a 401(k) plan are fully taxable at ordinary income tax rates. That compares with a Roth 401(k) plan, where all contributions are after tax, but distributions are tax free in retirement.
Related Fool Articles
Recent Mentions on Fool.com
- Why Is Ford's Stock Up 12% This Year, and Can the Gains Continue?
- 5 Things Hewlett-Packard Management Wants You to Know
- 3 Reasons Windstream Holdings, Inc.'s Stock Could Rise
- As the Black Hawk Fades to Black, Who Will Build the U.S. Army's Next $100 Billion Helicopter?
- Is This Warren Buffett's Next Big Buy?
- Retirement for Business Owners: How to Make Your Business Work for You