Question

Nick is going to be graduating in December and has already accepted a position with a major accounting firm. His employer will provide either a 401k plan with a 2 for 1 match or a lump sum annuity that he can use to invest on his own. Nick chooses the 401k with match. Which reason below validates his rationale?
1. The 401k plan allows him to use pre-tax dollars to invest for his retirement.
2. The annuity may accompany fees, which could reduce the cost of his overall investment.
3. The employer match provides free money from his employer for his retirement.
4. All of the Above are valid reasons

Answer 1

Answer:

1. The 401k plan allows him to use pre-tax dollars to invest for his retirement.

Explanation:

A 401k plan allows an individual to save money for retirement without paying income taxes for each contribution that he/she makes to the retirement plan. The individual will pay income taxes only after he/she retires and starts withdrawing out of the 401k plan (it is a tax deferred account). Employer's matching of 401k contributions are also taxed once you start withdrawing money. The tax free contributions allow the 401k account to grow faster and earn more money.