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is deposited; a Roth IRA allows tax deductions when the money is deposited and then the money is taxed when it is withdrawn; and a traditional IRA is taxed when the money is withdrawn.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is deposited; a Roth IRA allows tax deductions when the money is deposited and then the money is taxed when it is withdrawn; and a traditional IRA is taxed when the money is withdrawn.

A 401k is taxed when the money is withdrawn; a Roth IRA is taxed when the money is deposited; and a traditional IRA allows tax deductions when the money is deposited and then the money is taxed when it is withdrawn.
A 401k is taxed when the money is withdrawn; a Roth IRA is taxed when the money is deposited; and a traditional IRA allows tax deductions when the money is deposited and then the money is taxed when it is withdrawn.

A 401k is taxed when the money is withdrawn; a Roth IRA allows tax deductions when the money is deposited and then the money is taxed when it is withdrawn; and a traditional IRA is taxed when the money is deposited.
A 401k is taxed when the money is withdrawn; a Roth IRA allows tax deductions when the money is deposited and then the money is taxed when it is withdrawn; and a traditional IRA is taxed when the money is deposited.

A 401k allows tax deductions when the money is deposited and then the money is taxed when it is withdrawn; a Roth IRA is taxed when the money is deposited; and a traditional IRA is taxed when the money is withdrawn.

1 answer

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

  1. 401(k): Contributions to a 401(k) plan are made with pre-tax dollars, meaning you don't pay taxes on the money when it is deposited into the account. Instead, taxes are paid when you withdraw the money in retirement.

  2. Roth IRA: Contributions to a Roth IRA are made with after-tax dollars, meaning you pay taxes on the money before it goes into the account. However, withdrawals from a Roth IRA in retirement are tax-free, provided certain conditions are met.

  3. Traditional IRA: Similar to a 401(k), contributions to a traditional IRA may be tax-deductible, meaning you can reduce your taxable income by the amount you contribute. However, you will pay taxes on the money when you withdraw it during retirement.

Based on this explanation, the correct response that matches these tax treatments is:

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.