Which type of retirement account is funded with pre-tax dollars?

The correct answer is that a Traditional IRA or 401(k) is funded with pre-tax dollars. This is significant because contributions made to these accounts are deducted from your taxable income for the year, which can lower your overall tax burden. For example, if you earn $50,000 and contribute $5,000 to a Traditional IRA or 401(k), your taxable income for that year is effectively reduced to $45,000. This allows your investments to grow tax-deferred until you withdraw the money during retirement, at which point you will pay taxes on the withdrawals, typically at a lower tax rate if your income has decreased.

On the other hand, a Roth IRA is funded with after-tax dollars, meaning contributions do not reduce your current taxable income. Health Savings Accounts can offer tax advantages, but they are mainly used for medical expenses rather than for retirement savings in the same way. Mutual funds are investment vehicles that pool money from multiple investors to purchase securities, but they do not directly specify whether they are funded with pre-tax or after-tax dollars, as this depends on the account type through which they are held.