Colorado Life Producer License Practice Test

What option do employees have under a 401K plan?

1. To invest in real estate

2. To withdraw a fixed amount each month

3. To reduce their current salaries to contribute

4. To take their pension immediately

The correct answer is: To reduce their current salaries to contribute

Employees have the option to reduce their current salaries to contribute to a 401(k) plan, making this choice the correct answer. By participating in a 401(k) plan, employees designate a portion of their earnings to be deducted from their paychecks before taxes are applied. This deferral not only supports saving for retirement but can also reduce their taxable income for the year, providing a tax advantage. The ability to reduce salaries for contributions typically allows employees to accumulate retirement savings more effectively over time, often with matching contributions from employers, which can further enhance their retirement funds. In the context of the other options, investing in real estate is not a direct function of a 401(k) plan, although some plans might allow self-directed investments where this could be a possibility. Withdrawing a fixed amount each month is not standard for 401(k) plans unless the participant has reached retirement age or has had a qualifying event. Taking a pension immediately isn't applicable to a 401(k) plan, as pensions and 401(k) plans are different retirement savings vehicles, with employer-sponsored pensions not typically offering immediate access.