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Tax Advantages

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Your 401(k) plan has tax advantages that can help you save more money more quickly than you could with a regular savings account. 

Pay Less in Income Taxes

Contributions to your 401(k) plan are automatically deducted from your paycheck before your income taxes are figured. This means you pay less current income tax than you would pay if you saved after taxes. When you eventually receive your balance from the plan, your withdrawals will be taxable as ordinary income.*

After retirement, however, many people find themselves in a lower tax bracket.

See how pre-tax savings works:

Tax Advantages

Tax-deferred Compounding May Make you More Money

The money your 401(k) plan investments earn is reinvested without being reduced by current income taxes, and therefore it may generate more earnings. This powerful benefit is called tax-deferred compounding. Over the years, this means your 401(k) plan account balance has the potential to grow faster than it would in a savings account, where your interest is taxed every year, whether or not you make a withdrawal.

See how tax-deferred compounding works.

Account Value

As you can see from this chart, after 30 years an investment in a tax-deferred account may be worth about $60,000 more than an investment in a taxable account.

*A 10% tax penalty may apply to withdrawals made before age 59-1/2.
 
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