Rules of the Game

401(k) under the Hood

I'm proud to be paying taxes in the United States. The only thing is—I could be just as proud for half the money.

–Arthur Godfrey

Think back to the day when you were six years old and woke up one sunny morning to find a bright, shiny quarter under your pillow. Try to block out the pain and suffering of losing a tooth the day before that morning of pure joy. The good Tooth Fairy had left you some cold, hard cash in exchange for an extracted body part.

Perhaps you did not realize it at the time, but getting that quarter as a gift is probably the best way you can get money. Technically, if you got the cash through other means, such as hard labor, the courts (sometimes), good luck in gambling, or nefarious measures, you would still have to pay income tax on it. It seems taxes are everywhere. Do not forget that the notorious Al Capone was jailed for income tax evasion rather than any other crimes he may have committed against society.

First, you did not have to work for the cash gift (although you may have felt some pain). Because you received it as a gift, you did not have to pay it back. Also, you paid no taxes on it, although the Tooth Fairy might have had to pay some gift taxes if she had been a lot more generous (from the IRS's perspective, not yours) in her gift. Not even a 401(k) plan can do that for you, although it comes close.


Employer-sponsored retirement savings plans come in a variety of forms, the most ...

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