Question

Which of the following choices describe characteristics of a Roth 401(k)? (Check all that apply.)

a) Tax-Free Distributions
b) Employer Contributions
c) Tax-Deductible Contributions
d) Early Withdrawal Penalty

Answer 1

A Roth 401(k) allows for tax-free distributions and employer contributions, does not feature tax-deductible contributions, and imposes an early withdrawal penalty if specific conditions are not met.

Step-by-step explanation:

The characteristics of a Roth 401(k) are somewhat of a blend of Roth IRA and traditional 401(k) features. The key attributes include tax-free distributions, meaning that while contributions are made with after-tax dollars, qualifying withdrawals are not taxed. The advantage is that the account growth and earnings are also not subject to tax upon distribution, assuming certain conditions are met. Unlike Roth IRAs, Roth 401(k)s do allow for employer contributions, although these employer contributions are made pre-tax and would be subject to taxation upon withdrawal. Contributions to a Roth 401(k) are not tax-deductible since they are made with after-tax money, which differs from traditional 401(k)s where contributions are made pre-tax. Lastly, there is an early withdrawal penalty if distributions are taken before age 59½ and certain conditions are not met.