Question

Select the correct answer from each drop-down menu.

In a ____ 401(k), the contributions are tax deductible, and income generated by the account is_____
In a _____401(k), the contributions are taxable when deposited, but when the money is withdrawn at retirement they are _______

Answer 1

A traditional 401(k) features tax-deductible contributions and tax-deferred income, while a Roth 401(k) has taxable contributions but tax-free withdrawals at retirement. These plans are essential for retirement savings, as they provide ways to invest and manage money for the future.

Step-by-step explanation:

In a traditional 401(k), the contributions are tax deductible, and income generated by the account is tax-deferred. In a Roth 401(k), the contributions are taxable when deposited, but when the money is withdrawn at retirement they are tax-free.

Defined contribution plans like 401(k)s offer flexible options for retirement savings, allowing a fixed employer contribution, as well as contributions by employees. These contributions can be invested in various vehicles, yielding real rates of return that potentially offset the effects of inflation. The key distinction is that with a traditional 401(k), taxes are deferred until withdrawal, whereas with a Roth 401(k), taxes are paid upfront, allowing tax-free withdrawals in retirement.