Does money in a 401k grow tax-free?

When you choose investments within your 401 (k) plan and as those investments grow, you won't have to pay income taxes on growth either. Instead, you defer paying those taxes until you withdraw the money. 401 (k), named after a section of the Internal Revenue Code, are employer-sponsored defined contribution (DC) plans that offer workers a tax-advantaged way to save for retirement. If your employer offers a 401 (k) plan, you can choose to contribute a percentage of your income to the plan.

Contributions will automatically be deducted from your paycheck. If you contribute to a traditional 401 (k) plan, you can deduct them from your taxes. With a Roth 401 (k), the main difference is when the IRS keeps its share. You make contributions to the Roth 401 (k) with money that has already been taxed, just like you would with a Roth Individual Retirement Account (IRA).

So, any profit increases tax-free and you don't pay taxes when you start withdrawing money when you retire, 1.