All of the following are advantages of saving for retirement in a 401(k), except:

• A. Contributions may reduce your taxable income
• B. Employers may offer matching contributions
• C. Withdrawals before age 59½ are always tax-free
• D. Investment earnings grow tax-deferred

Answer: (C)

Verified step by step guidance

1. Understand the concept of a 401(k): A 401(k) is a retirement savings plan sponsored by an employer. It allows employees to save and invest a portion of their paycheck before taxes are taken out.
2. Review the advantages of a 401(k): Contributions can reduce taxable income, employers may offer matching contributions, and investment earnings grow tax-deferred. These are key benefits of the plan.
3. Clarify the tax implications of withdrawals: Withdrawals from a 401(k) before age 59½ are generally subject to income tax and may incur an additional 10% early withdrawal penalty, unless specific exceptions apply.
4. Identify the incorrect statement: The claim that 'Withdrawals before age 59½ are always tax-free' contradicts the tax rules for 401(k) plans, as early withdrawals are typically taxed and penalized.
5. Conclude that the correct answer is the statement that does not align with the advantages of a 401(k), which is 'Withdrawals before age 59½ are always tax-free.'