Series 7 practice questioneasyRetirement Accounts — 401(k) Plans
Which of the following is a key feature of a 401(k) retirement plan?
- AContributions are made exclusively by the employer
- BWithdrawals may be made at any time without penalty
- CThere are no limits on annual employee contributions
- DEmployee contributions are made on a pre-tax basis through payroll deductions✓ Correct answer
Explanation
Why D — Employee contributions are made on a pre-tax basis through payroll deductions
A 401(k) plan allows employees to make contributions on a pre-tax basis through payroll deductions, reducing their current taxable income. Employers may also make matching or discretionary contributions. Annual contribution limits are set by the IRS and are adjusted periodically for inflation. Early withdrawals before age 59 1/2 generally incur a 10% penalty plus ordinary income tax.
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