Saving for Retirement: The Traditional 401(k)

By Patricia Uceda, Spring 2015 Graduate Research Assistant

A traditional 401(k) is a retirement savings plan that allows you to invest money now and defer paying income taxes on the saved money and earnings until you start withdrawing at retirement.  These accounts are typically provided by your employer and allow you to make contributions directly from your earnings.

You will decide what you want to contribute, and this amount will be automatically deducted from your paycheck. In a traditional 401(k) account, your contributions will not be taxed as income the year you earn them.  You pay taxes on the funds when you withdraw them at retirement. This can be beneficial to you because it allows you to invest more money and potentially pay a lower tax rate if you retire in a lower tax bracket.  However, if you withdraw from your retirement account before the age of 59 ½, you will have to pay a 10% penalty.