when you contribute to your 401 k account your money is invested according to your choices from the options your employer offers these typically include an assortment of stock and bond mutual funds as well as target date funds designed to reduce the risk of investment losses as you approach retirement 
according to lazaroff target date funds are the way you re least likely to make mistakes these accounts contain a mix of stocks bonds and other securities that are adjusted as your chosen date approaches generally shifting toward more conservative investments as you near retirement you might be different from the average and you might accumulate enough wealth one day where a target date fund isn t the most appropriate but for many people it s one of the easier and least risky routes to take if available in their plan allows it lazaroff said several factors influence the pace and extent of your 401 k s growth including the amount you contribute annually any company matches investment performance and the time until retirement a significant benefit of a 401 k is tax deferred growth as long as you don t remove funds from your account you don t have to pay taxes on investment gains interest or dividends until you withdraw money from the account after retirement however if you have a roth 401 k you won t have to pay taxes on qualified withdrawals when you retire as contributions are made with after tax dollars 2324crucially opening a 401 k when you are young allows your money to grow more over time thanks to the power of compounding compounding occurs when the returns generated by your savings are reinvested into the account generating returns of their own over many years the compounded earnings on your 401 k account can exceed the amount you contributed this is why as you continue to contribute to your 401 k it can grow quite substantially by the time you retire 401 k withdrawalsonce your money goes into a 401 k it can be difficult to withdraw without paying taxes on the amount 23 make sure that you still save enough on the outside for emergencies and expenses you may have before retirement said dan stewart the head of dallas based revere asset management inc do not put all of your savings into your 401 k where you cannot easily access it if necessary earnings in a 401 k account are tax deferred for traditional 401 k accounts and tax free for roth accounts when you withdraw from a traditional 401 k that money which has never been taxed will be taxed as ordinary income roth account owners have already paid income tax on the money they contributed thus you won t owe taxes on withdrawals if you satisfy specific requirements 2524both traditional and roth 401 k owners must be at least 59 or meet other internal revenue service irs criteria such as being totally and permanently disabled when you start making withdrawals so you don t face any penalties 2317 usually there s an additional 10 early distribution tax on top of any other tax you owe if you withdraw early 2317some employers allow employees to take out a loan against their 401 k plan contributions essentially borrowing from themselves if you take out a 401 k loan and leave the job before repaying it you ll have to repay it in a lump sum or face the 10 penalty for an early withdrawal 26required minimum distributionstraditional 401 k account holders have required minimum distributions rmds after reaching a certain age withdrawals are called distributions in irs parlance 27account owners who have retired must start taking rmds from their 401 k plans at age 73 the size of the rmd is calculated based on your life expectancy at the time before 2020 the rmd age was 70 years old before 2023 it was 72 28 it was updated to age 73 in the omnibus spending bill h r 2617 in 2022 29note that distributions from a traditional 401 k are taxable but qualified withdrawals from a roth 401 k are not 24roth iras unlike roth 401 k s are not subject to rmds during the owner s lifetime 30traditional 401 k vs roth 401 k 