Reduces taxable income
Who doesn’t want to reduce their taxable income?
In terms of regular savings accounts, your contributions will be made up of after-tax dollars. The contributions you make to your 401(k) are taken out of your paycheck before you pay taxes, meaning that the money you contribute doesn’t get taxed.
All in all, if you contribute the full $19,500 this year and are in the 24% tax bracket, your taxes could go down all the way to $4,700.
This is great for those who want to save more money right now, which is good for those who still have a few steps to climb at their respective jobs via raises and bonuses.
You’ll owe taxes when you start taking distributions. Most people have lower incomes during retirement- if they plan accordingly, meaning they’ll be in a lower tax bracket. The taxes you’ll pay then will be much lower than the ones you’ll be expected to pay while you’re making contributions.
