There are two main types of 401(k) plans: traditional and Roth. In a traditional 401(k) plan, employee contributions are made pre-tax, meaning their salary is reduced by the amount of taxable income, thereby reducing the current year’s tax burden. However, when employees withdraw these funds during retirement, they will be subject to taxation.
In contrast, in a Roth 401(k) plan, employee contributions are made with after-tax income, so there are no tax breaks in the contribution year. However, when they withdraw the funds during retirement, they are tax-free, providing a level of financial security for retirement.