What tax advantage does a 401(k) plan offer?

A 401(k) plan offers a significant tax advantage because contributions are made on a pre-tax basis. This means that the money you contribute to your 401(k) reduces your taxable income for the year, which can lead to a lower overall tax bill at the time of contribution. For example, if you earn $60,000 and contribute $5,000 to your 401(k), you are only taxed on $55,000 of income for that year, rather than the full $60,000.

This pre-tax contribution allows individuals to save for retirement while receiving an immediate tax benefit. Additionally, the funds in a 401(k) grow tax-deferred, meaning that you won't pay taxes on investment earnings until you withdraw the money, typically during retirement when you may be in a lower tax bracket.

The other options presented do not accurately represent the tax benefits associated with a 401(k). Contributions made after-tax would not reduce taxable income, a flat tax rate is not applicable to 401(k) contributions, and withdrawing funds without penalty before retirement is generally not allowed without specific circumstances, such as hardship withdrawals, which typically carry tax implications.