401(k)

A type of Defined Contribution Plan available in the US. There are three types of contributions that can be made to 401(k)s.

  • Pre-tax – No taxes are paid on the contributions or any changes in the market value of the investments in the account until the money is withdrawn. That is, contributions are deducted from your salary in the year they are made.
  • After-tax – Contributions are made with after-tax dollars, but the changes in the market value of the investments purchased with that money are taxed when they are withdrawn.
  • Roth – Contributions are made with after-tax dollars, but no taxes are paid on any changes in the market value of the investments in the account or when money is withdrawn from the account (as long as certain conditions are met).