Jenny (35 years old) is considering making a one-time contribution to either a traditional401(k) plan or to a Roth 401(k) plan. She plans to withdraw the account balance when she retires in 40 years. Jenny expects to earn a 7% before-tax rate of return no matter which plan she contributes to. Which of the following statements is true?
A) Jenny is not allowed to make a one-time contribution to either plan.
B) If Jenny's marginal tax rate in the year of contribution is higher than her marginal tax rate in the year of distribution, she will earn a higher after-tax rate of return on the traditional 401(k) plan than on the Roth 401(k) plan.
C) Jenny will earn the same after-tax rate of return no matter which plan she contributes to.
D) If Jenny's marginal tax rate in the year of contribution is lower than her marginal tax rate in the year of distribution, she will earn a higher after-tax rate of return on the traditional 401(k) plan than on the Roth 401(k) plan.

Question

Quizplus · Accepted Answer

If Jenny's marginal tax rate is higher at the time of contribution than at the time of distribution, the traditional 401(k) is more beneficial because she defers taxes at a higher rate and pays them at a lower rate upon withdrawal.

Jenny (35 Years Old) Is Considering Making a One-Time Contribution