One of the most well-known tax shelters is the 401(k) savings account, which is deliberately created and permitted by federal law.
Employers who create a special financial plan under 26 U.S.C. 401(k) can help their employees save for retirement while reducing their present taxable income. Employees can choose to make pre-tax contributions to their 401(k) savings accounts, so that the wages contributed will be excluded from their income tax.
Furthermore, investment earnings accrued in a 401(k) savings account will not be taxed until funds are withdrawn from the account. Employees thus gain a financial advantage, because the untaxed compound interest can grow at a quicker rate than it would under continuous taxation.