What is a tax advantage of contributing to a traditional 401(k)?

• A. Tax-deferred growth
• B. Tax-free withdrawals in retirement
• C. Tax credits on contribution
• D. Earnings are guaranteed

Answer: (A)

Contributing to a traditional 401(k) offers tax-deferred growth. Your contributions are made with pretax dollars, which lowers your current taxable income, and the investments inside the account grow without you paying taxes on the earnings each year. You pay taxes later when you withdraw in retirement, typically at your ordinary income tax rate at that time. This tax timing is the main advantage of a traditional 401(k).

The other ideas don’t fit: withdrawals in retirement from a traditional 401(k) are taxed, not tax-free; there aren’t tax credits given for traditional 401(k) contributions; and earnings aren’t guaranteed—the account’s value depends on investment performance.