Get Two Major Breaks
Your program is known as “tax advantaged” for two good reasons—pre-tax contributions and tax-deferred growth. Contributions to the program are made on a pre-tax basis*—this means contributions are made before taxes are taken out, thus lowering your gross, taxable income and reducing your annual tax payments while you are saving. And your investments grow tax-deferred. In other words, you don’t have to pay taxes on the interest earned or the deferred income until you withdraw funds at retirement, when your tax rate is likely to be lower than it is now.

Save Now
As this hypothetical example shows, when you contribute to the program, these tax breaks help reduce your current income taxes:

Suppose you earn $30,000 a year and contribute 10 percent of your pay ($3,000 annually) to your employer-sponsored retirement program. At tax time, your program contributions don’t count as part of your taxable income. You’d likely be in the 15 percent income tax bracket and have a $450 annual tax advantage. That money would help subsidize your contributions. The higher your income tax bracket, the greater the tax advantages would be.

Save Later
Further, because your investments have the potential to grow tax-deferred, you avoid the expense—and hassle—of paying taxes on your program dividends or capital gains every April 15. That means 100 percent of your balance is left to earn interest until you withdraw it. Only then do you owe taxes on the money from your program.

Sound like a minor detail? It's not. Especially when you consider that all of your contributions—and the interest they earn—stay in your account with the potential to grow for the life of your retirement program. Over a 30-year period, you could potentially end up with twice what you would have by putting the same amount in a traditional savings account, even after taxes are deducted at retirement.

*Please note that some programs may allow after-tax contributions as well.

Neither Prudential Financial nor any of its representatives are tax or legal advisors and encourage you to consult your individual legal or tax advisor with any specific questions.