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Explain the differences in how a 401k, a Roth IRA, and a traditional IRA are taxed.(1 point)

Responses

A 401k is taxed when the money is deposited; a Roth IRA allows tax deductions when the money is deposited and then the money is taxed when it is withdrawn; and a traditional IRA is taxed when the money is withdrawn.
A 401k is taxed when the money is deposited; a Roth IRA allows tax deductions when the money is deposited and then the money is taxed when it is withdrawn; and a traditional IRA is taxed when the money is withdrawn.

A 401k is taxed when the money is withdrawn; a Roth IRA allows tax deductions when the money is deposited and then the money is taxed when it is withdrawn; and a traditional IRA is taxed when the money is deposited.
A 401k is taxed when the money is withdrawn; a Roth IRA allows tax deductions when the money is deposited and then the money is taxed when it is withdrawn; and a traditional IRA is taxed when the money is deposited.

A 401k allows tax deductions when the money is deposited and then the money is taxed when it is withdrawn; a Roth IRA is taxed when the money is deposited; and a traditional IRA is taxed when the money is withdrawn.
A 401k allows tax deductions when the money is deposited and then the money is taxed when it is withdrawn; a Roth IRA is taxed when the money is deposited; and a traditional IRA is taxed when the money is withdrawn.

A 401k is taxed when the money is withdrawn; a Roth IRA is taxed when the money is deposited; and a traditional IRA allows tax deductions when the money is deposited and then the money is taxed when it is withdrawn.

1 answer

Here's a breakdown of how each retirement account is taxed:

  1. 401(k): Contributions are made pre-tax, meaning they are deducted from your taxable income at the time of deposit. You pay taxes on the money when you withdraw it, typically in retirement.

  2. Roth IRA: Contributions are made with after-tax dollars, meaning you pay taxes when you deposit the money. Withdrawals in retirement are tax-free, provided certain conditions are met.

  3. Traditional IRA: Similar to a 401(k), contributions may be tax-deductible (depending on income and other factors), and taxes are paid upon withdrawal during retirement.

Given this information, the correct statement would be:

A 401(k) allows tax deductions when the money is deposited and then the money is taxed when it is withdrawn; a Roth IRA is taxed when the money is deposited; and a traditional IRA is taxed when the money is withdrawn.