Answered

Select the correct answer from each drop-down menu.



In a traditional 401(k), the contributions are tax-deductible, and income generated by the account is [tax-deferred / tax-exempt].



In a [Roth / traditional] 401(k), the contributions are taxable when deposited, but when the money is withdrawn, the earnings are [tax-deferred / tax-exempt].

Verified Answer :

Final answer:

In a traditional 401(k), contributions are tax deductible and income generated by the account is tax deferred. Conversely, contributions to a Roth 401(k) are taxable at deposit, but withdrawals can be tax exempt. Understanding these differences is crucial for effective retirement planning.


Explanation:

Understanding 401(k) Contributions


In a traditional 401(k), the contributions are tax deductible, meaning that the amount you contribute can reduce your taxable income in the year you make the contribution. This allows you to potentially lower your tax bill and save more for retirement.



  • Income generated by the account is tax deferred, which means that while your investments grow within the account, you will not pay taxes on any capital gains, dividends, or interest until you withdraw the money.


On the other hand, in a Roth 401(k), the contributions you make are taxable when deposited, meaning you pay taxes on the income before contributing it to your retirement account. However, the big advantage comes when you withdraw the money in retirement: as long as certain conditions are met, the withdrawals can be tax exempt, meaning you pay no taxes on your earnings.


To summarize:



  1. Traditional 401(k): Contributions are tax deductible.

  2. Income generated is tax deferred.

  3. Roth 401(k): Contributions are taxable when deposited; withdrawals can be tax exempt.


Learn more about 401(k) Plans here:

https://brainly.com/question/32412486


Related Questions