A few weeks ago, a friend of mine started his first corporate job and asked me,
“Hey… are my 401(k) contributions taxed? Because my paycheck looks smaller!”
If you’ve ever felt confused about how 401(k) taxes actually work, you’re not alone.
Most people sign up for a retirement plan without fully understanding what gets taxed, when it gets taxed, and how much they actually save.
This article breaks down the answer in the simplest, most practical way — no jargon, no complicated terms.
Let’s get straight into it.
The Short Answer: It Depends on the Type of 401(k)
There are two main types of 401(k)s in the U.S.:
✔ Traditional 401(k)
Your contributions are not taxed today.
You pay tax later when you withdraw the money in retirement.
✔ Roth 401(k)
Your contributions are taxed today.
You withdraw money tax-free in retirement.
That’s the whole foundation.
But let’s break it down more clearly.
How a Traditional 401(k) Is Taxed (Most Common)
1. Contributions: Not taxed now
When you put money into a traditional 401(k), it reduces your taxable income.
Example:
If your salary is $60,000 and you contribute $6,000:
You’re taxed on $54,000, not $60,000.
This is why your paycheck becomes slightly smaller — but your tax bill becomes a lot smaller too.
2. Growth: Tax-deferred
Your money grows without paying taxes each year.
No tax on:
– investment gains
– dividends
– interest
– capital growth
3. Withdrawals: Taxed later
When you take money out after age 59½, it’s taxed as regular income, not as capital gains.
4. Early withdrawals: Penalized
Before age 59½ →
10% penalty + income tax (unless you qualify for an exception).
How a Roth 401(k) Is Taxed
1. Contributions: Taxed today
The money you contribute comes from your already-taxed paycheck.
No tax benefit now.
2. Growth: Tax-free
Your investments grow without taxes forever.
3. Withdrawals: Completely tax-free
If you follow the rules, all withdrawals after age 59½ are 100% tax-free.
This is huge if you expect your tax rate to be higher in retirement.
What About Employer Match — Is It Taxed?
Most people don’t know this part.
✔ Employer match is ALWAYS pre-tax
This means:
– It is not taxed now
– It will be taxed later when withdrawn
Even in a Roth 401(k), the match is still treated like a traditional contribution.
Employer match goes into a separate pre-tax bucket, even if your contributions are Roth.
Are 401(k) Contributions Taxed by State?
In most states:
– Traditional contributions are not taxed
– Roth contributions are taxed
– Withdrawals follow federal rules but may have state tax depending on your state
States like Florida, Nevada, Texas, and Washington have no income tax on withdrawals.
Which 401(k) Saves You More in Taxes?
Traditional 401(k) is better if:
✔ You want a lower tax bill today
✔ You expect to be in a lower tax bracket later
✔ You’re early in your career and need cash flow
Roth 401(k) is better if:
✔ You want tax-free retirement income
✔ You expect taxes to rise in the future
✔ You are young and have decades for growth
Real Example: What Gets Taxed?
Imagine Sarah earns $80,000 and contributes $8,000.
Traditional 401(k):
– Contribution: Not taxed
– Growth: Not taxed
– Withdrawal: Taxed
Roth 401(k):
– Contribution: Taxed
– Growth: Not taxed
– Withdrawal: Not taxed
Simple, right?
So… Are 401(k) Contributions Taxed? Final Answer
Here’s the clean summary:
✔ Traditional 401(k): No tax today, taxed later
✔ Roth 401(k): Tax today, no tax later
✔ Employer match: Always taxed later
✔ Growth: Tax-deferred (Traditional) or tax-free (Roth)
What really matters is which option saves you more money long-term — and that depends on your future tax bracket.