Which statement best describes how employees contribute to a 401(k) plan?

Which statement best describes how employees contribute to a 401(k) plan?

• A. Contributions are salary deferral on a post-tax and/or pretax basis.
• B. Contributions are strictly after-tax with no pretax option.
• C. Contributions are guaranteed to earn a fixed return.
• D. Contributions are limited to employer contributions only.

Answer: (A)

Employee contributions to a 401(k) are made through salary deferral. This means part of each paycheck is set aside into the retirement plan. The amount can come in on a pretax basis (traditional 401(k)), which lowers your current taxable income, or on an after-tax basis (Roth 401(k) if your plan offers it), which means you’ve already paid taxes on those contributions but qualified withdrawals later can be tax-free. This combination is why the statement describing contributions as salary deferral on a post-tax and/or pretax basis is the best fit. It’s not about earning a fixed return—investment returns inside a 401(k) depend on the chosen investments and market performance. Also, while employers may contribute matching funds, employee contributions are not limited to employer contributions only.

Employee contributions to a 401(k) are made through salary deferral. This means part of each paycheck is set aside into the retirement plan. The amount can come in on a pretax basis (traditional 401(k)), which lowers your current taxable income, or on an after-tax basis (Roth 401(k) if your plan offers it), which means you’ve already paid taxes on those contributions but qualified withdrawals later can be tax-free. This combination is why the statement describing contributions as salary deferral on a post-tax and/or pretax basis is the best fit.

It’s not about earning a fixed return—investment returns inside a 401(k) depend on the chosen investments and market performance. Also, while employers may contribute matching funds, employee contributions are not limited to employer contributions only.