What are the two types of contribution options available in a 401(k)?

In a 401(k) retirement plan, the primary contribution options are pre-tax contributions and Roth contributions, which are considered after-tax contributions. Pre-tax contributions allow participants to defer taxes on the money they contribute until they withdraw it during retirement. This can be advantageous as it reduces taxable income in the year the contribution is made, potentially placing the individual in a lower tax bracket upon withdrawal.

On the other hand, Roth contributions are made with after-tax dollars, meaning that the contributions are taxed at the time they are made. The key benefit of Roth contributions is that qualified withdrawals during retirement are tax-free, providing a significant tax advantage if tax rates increase or if the individual is in a higher tax bracket upon retirement.

This understanding of pre-tax and Roth contributions is crucial for individuals planning their retirement savings strategy, as it affects their current tax situation and future tax liabilities. Other options, such as matched contributions or classifications of taxable and non-taxable contributions, do not directly represent the two main types of contribution options available within standard 401(k) plans.