What type of plan allows employees to save and invest a portion of their paycheck before taxes?

What type of plan allows employees to save and invest a portion of their paycheck before taxes?

• A. Pension plan
• B. Health savings account
• C. 401(k) plan
• D. Employee stock ownership plan

Answer: (C)

The choice pertaining to a 401(k) plan is indeed accurate because a 401(k) plan allows employees to contribute a portion of their paycheck to retirement savings before any taxes are deducted. This pre-tax contribution means that employees can lower their taxable income for the year they contribute, thereby reducing their immediate tax burden. In addition to tax advantages, the funds in a 401(k) grow tax-deferred until withdrawn, typically during retirement when individuals may be in a lower tax bracket. This type of plan is a popular retirement saving option offered by many employers and is designed to encourage long-term saving by enabling employees to invest in various assets, such as stocks and bonds. The other options do not serve this specific function. For instance, a pension plan is a defined benefit plan that pays employees a fixed income at retirement based on salary and years of service, but it does not allow for pre-tax contribution from employee paychecks in the same way. A health savings account is primarily used for medical expenses and does not directly pertain to retirement savings. An employee stock ownership plan is a program that provides employees with ownership interest in the company, typically through shares, but it does not facilitate saving directly from paychecks in the pre-tax manner of a

The choice pertaining to a 401(k) plan is indeed accurate because a 401(k) plan allows employees to contribute a portion of their paycheck to retirement savings before any taxes are deducted. This pre-tax contribution means that employees can lower their taxable income for the year they contribute, thereby reducing their immediate tax burden.

In addition to tax advantages, the funds in a 401(k) grow tax-deferred until withdrawn, typically during retirement when individuals may be in a lower tax bracket. This type of plan is a popular retirement saving option offered by many employers and is designed to encourage long-term saving by enabling employees to invest in various assets, such as stocks and bonds.

The other options do not serve this specific function. For instance, a pension plan is a defined benefit plan that pays employees a fixed income at retirement based on salary and years of service, but it does not allow for pre-tax contribution from employee paychecks in the same way. A health savings account is primarily used for medical expenses and does not directly pertain to retirement savings. An employee stock ownership plan is a program that provides employees with ownership interest in the company, typically through shares, but it does not facilitate saving directly from paychecks in the pre-tax manner of a