The employee directs the employer to withhold part of the employee's current salary and to make tax-deferred payments to the employee's retirement account. Contributions r Contributions, as well as any earnings on the account accumulate tax-deferred until money is withdrawn.
Some plans allow for after-tax contributions.
Employers may match all or part of the employee's contribution. Contributions are sometimes made through company profit-sharing plans. Employees who are enrolled in profit-sharing plans elect to contribute their income from the plan into their accounts. As a result, payment of income taxes is based only on the reduced amount. Since income taxes are deferred until withdrawal, all earnings are added to the balance, and as the savings grow, there is a return on both the contributions and the earnings.