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Originally Posted by saden1
401k contributions aren't taxed at all until they are withdrawn and there a lot of rules around it. For one thing you can borrow against it and not pay taxes or penalty on it so long as you pay it back within 5 years (except when buying a home). You are required to withdraw a minimum amount of it when you turn 70.5 (this requirement was suspended by congress for 2009 because of the economic downturn).
You are technacally suppose to be taxed on it at the tax bracket you were in at your last income generating position before retirement (It doesn't mean you can go get a job at McDonald's though to lower your tax bracket). There are some strategies you can employ to lower your taxes. For example, if you don't anticipate your tax bracket to be lower as you get older and near retirement it might be wise to convert your 401k to Roth IRA before you retire since isn't subjected to minimum distribution rules which could cost you in the long run.
Bottom line is the rules around 401k are quite generous and if you combine it with other financial instruments (i.e. whole life insurance) you can definitely lower your tax bill when you retire.
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Interesting. Thanks for that info!