At what point are contributions made to a 401(k) plan typically taxed?

Contributions made to a traditional 401(k) plan are taxed at the point of distribution, which typically occurs at retirement. This means that employees can contribute to their 401(k) plan on a pre-tax basis, allowing them to defer taxation on those contributions until they withdraw the funds in retirement. At that point, the distributions are treated as ordinary income and subject to income tax.

The advantage of this deferred taxation is that individuals may find themselves in a lower tax bracket upon retirement compared to when they were working, potentially reducing their overall tax liability. This also allows individuals to invest and grow their contributions tax-free until withdrawal, maximizing their retirement savings.

Roth 401(k) contributions, however, are an exception because they are made with after-tax dollars, meaning they are taxed at the time of contribution. Subsequent withdrawals of the contributions and earnings can then be tax-free, provided certain conditions are met. This distinction highlights why some contributions are taxed differently, but when referring to traditional 401(k) plans, taxation occurs when funds are distributed, not at the time of contribution or during in-service withdrawals.