Pre-tax contributions...

After-tax contributions...

Come out of your pay before

Come out of your pay after

Lower your current taxable income, so you pay less in taxes now

Do not lower your current taxable income

Increase your take home pay now

Do not increase your take home pay

Are taxed as ordinary income when you take money out of the plan

Are not taxed at withdrawal because you've already paid it--but you do have to pay tax on any earnings

Have restrictions on withdrawals before age 59 1/2 to encourage you to save for when you'll need it most: at retirement. If you withdraw before-tax contributions before you reach age 59 1/2, you pay ordinary income tax and possibly a 10 percent early withdrawal penalty, unless you qualify for an exception to this rule.

Have fewer restrictions on withdrawals before age 59 1/2. If you withdraw from your after-tax savings before you're 59 1/2, you must also withdraw part of the earnings on that money, which is taxable, and may be subject to the 10 percent early withdrawal penalty, unless you qualify for an exception to this rule.

* Note: You do not have to withdraw earnings on any money you invested in 1986 or earlier.