When you contribute to your 401(k) or retirement plan, you make contributions before you pay taxes on the amount of your contribution, and you pay taxes on what remains of the income or wages, less the amount of your annual retirement plan contribution. When you retire and begin to withdraw money from the retirement account, you must pay taxes on this ordinary income at that time. In this way, you are able to contribute to your retirement plan using pretax dollars instead of after-tax dollars.