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A 401K is a retirement account offered through your employer. Employers have the option to match your contributions. For example, you contribute 5% and your employer also contributes 5%.
The tax benefit of a 401K is that you do not pay taxes on the money you contribute. You pay with pre-tax dollars and you can deduct your contributions on your tax return.
Sounds good right! Well, it is a good tax benefit when you begin contributing to a 401K. But as you build up a balance, you will have to pay taxes on that large amount at the end when it’s time to withdraw.
This is referred to as tax later, meaning you will end up paying taxes at a later time.