Question

Which two statements describe how saving $200 every month in her traditional 401(k) retirement account is different from saving $200 every month for her car? Select all the correct answers. Isabel’s retirement savings are made with after-tax dollars. Isabel’s retirement savings are made with pretax dollars. Isabel’s retirement savings can be used for other purposes without penalty. Isabel’s retirement savings have more liquidity than the money in her savings account. Isabel’s retirement savings have no contribution limits. Isabel’s retirement savings may include a contribution from her employer.

Answer 1

Isabel’s retirement savings are made with pretax dollars.

Isabel’s retirement savings may include a contribution from her employer.

Explanation:

When you contribute to an IRA account, your contribution is tax deductible. This means that all the money that you contribute to your account comes from pretax dollars. This contribution is limited to $19,500 per year (for 2020) or $26,000 if you are 50 or older.

Your employer can also contribute to your 401(k) account and employer's contribution may be even higher than the employee's. Total contributions including employer's and employee's cannot exceed $57,000 per year (or $63,500 if 50 or older) or the employee's total compensation per year, whichever is lower.