401(k) tax shelter example

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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Furthermore, investment earnings accrued in a 401(k) savings account will not be taxed until funds are withdrawn from the account.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.