A 401(k) is a workplace retirement account, and the tax treatment of your contributions depends entirely on which type you choose. The two flavors — traditional and Roth — aren't just different account labels; they move your tax bill to different points in time.
Traditional: tax break now, taxed later
A traditional 401(k) contribution comes out of your paycheck before federal (and usually state) income tax is calculated. That lowers your taxable income for the year you contribute, which lowers your tax bill right now. The tradeoff: when you withdraw the money in retirement, both your original contributions and all the growth are taxed as ordinary income at that time.
Roth: taxed now, tax-free later
A Roth 401(k) contribution comes out of your paycheck after tax is calculated — it does nothing to reduce this year's taxable income. The tradeoff runs the other direction: qualified withdrawals in retirement, including all the growth, are completely tax-free. You're choosing to pay tax on the contribution now instead of on the (larger) balance later.
Neither option avoids FICA tax (Social Security and Medicare) — both traditional and Roth contributions are still subject to FICA, since FICA is based on gross wages, not taxable income.
2026 contribution limits
The IRS caps how much you can put into a 401(k) each year. For 2026, an employee can contribute up to $24,500 across traditional and Roth contributions combined. If you're 50 or older, you can add a catch-up contribution of an extra $8,000. A newer rule gives an even larger catch-up to people aged 60–63: up to an extra $11,250. Including employer matching and any other employer contributions, the combined employee-plus-employer total is capped at $72,000 for 2026.
A pre-tax contribution is a discount, not a dollar-for-dollar cost
Because a traditional contribution lowers your taxable income, it doesn't reduce your take-home pay by the full contribution amount — some of that money would have gone to tax anyway. Take a Single filer earning $80,000 in 2026, whose income (after the standard deduction) puts their marginal federal rate at 22%. If they contribute $5,000 to a traditional 401(k), they save $5,000 × 22% = $1,100 in federal tax. So that $5,000 contribution only actually costs them $3,900 of take-home pay — the rest is money that would have gone to the IRS either way, now going toward retirement instead.
A Roth contribution doesn't come with that same-year discount — a $5,000 Roth contribution really does reduce take-home pay by close to the full $5,000 (state tax rules aside), since it's made with money that's already been taxed. That's the whole tradeoff in a sentence: traditional discounts the contribution today; Roth discounts the withdrawal decades from now.