401(k)

• The only way you can set up a 401(k) retirement plan is if your employer offers one. If she does, you can choose to have a percentage of your paycheck deposited in an investment account instead of your bank account. There's no income tax withheld on the 401(k) contribution, nor is the money counted as taxable income on your 1040. In addition, you don't pay taxes of any sort on the interest your 401(k) earns until you withdraw the money.
  
  

Excess Deferrals

• The federal government sets a limit on how much you can contribute to a 401(k) in a year; in 2010, for example, the limit was $16,500. If your company's account administrator miscalculates your payroll deductions, it's your responsibility to contact the plan and request they send you the excess, and any interest it earned. If you get excess contributions from last year back before April 15 of this year, include it in last year's taxable income. If you receive the money after April 15, you pay tax on it both last year and this year.
  
  

Roth Contributions

• Employers who offer 401(k) plans can also offer a Roth account through your job. Instead of contributing to your 401(k), you can put some or all of the money into the Roth instead. Nothing you contribute to a workplace Roth is tax-free, so you'll pay income tax on it and have that tax withheld from your paycheck. The advantage of a Roth is that withdrawals are tax free: If you plan to have a high income when you're in your 60s, your Roth withdrawals won't push you into a higher tax bracket.
  
  

Withdrawals

• The income tax bite comes when you start taking money out of your 401(k). Normally, you add it to your taxable income for the year and pay the appropriate rate on the total. If you take out money before you're 59 1/2, however, you have to pay a 10 percent tax penalty on the withdrawal, as well. One exception is if you roll over the money you take out into an Individual Retirement Account, or if you've changed jobs, to a new employer's 401(k). In those cases, you can transfer the money without paying tax.