When do I pay tax on a 401(k)?
- What are defined contribution plans?
- How do defined contribution plans work?
- How does the money get invested?
- What tax benefits do 401(k)s offer?
- Do I have to contribute to my plan?
- Why is a 401(k) such a good deal?
- When do I pay tax on a 401(k)?
- How is a Roth 401(k) different?
- What is a matching contribution?
- How does vesting work exactly?
- How much should I contribute to my plan?
- What if I can't invest the maximum right now?
- What if I need the money before I retire?
- What if I leave my job?
When you eventually make withdrawals from a traditional defined contribution plan, you'll have to pay regular income taxes on the money you withdraw - whether the money came from your contributions, dividends or capital gains.
For traditional plans you will owe income tax on all your withdrawals - both the money you contributed and the gains on your contributions. Remember: Money you withdraw from a defined contribution plan is always taxed at your income tax rate at the time you withdraw it. (The current top income tax rate is 35%, though it's possible that the rate could be changed down the road.)
In the case of a Roth 401(k), you will have to pay tax on your contributions, but you won't be taxed later when you make withdrawals.
