401k retirement investment plans are ideal for people who will not have any type of income when they go past the retirement age of 59.5 years. The amount of money you pay as tax can get a little confusing if you do not understand the rules and conditions while applying for 401k plans.

Each time you invest in these plans, the amount of taxable income is reduced. This is because the amount of money you contribute towards these plans is taken directly from your pre tax income. This “decreases” the overall money you earn every year. This in turn would mean that you are not liable to pay taxes for these investments. This will help you save on a lot of money that would have otherwise gone on paying taxes.

On the other hand, each time you withdraw money when need arises after retirement, you are liable to pay income tax depending on the amount of money you have withdrawn. Therefore, you are not completely free of paying taxes to your respective governments. You are simply delaying the time for paying taxes in such cases.

The rules for paying tax change slightly if you decide to withdraw before you reach the retirement age. In these cases, you will have to pay a penalty along with taxes incurred by local and federal tax agencies. Generally, a 10 percent penalty has to be paid to the authorities if you wish to withdraw before 59.5 years. The amount of tax you pay along with the penalty can be as high as 20 to 30 percent.

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