Question

7 which of the following is a possible end result of contributing to a 401k?

more income tax paid but an increased tax return
more income tax paid and an decreased tax refund
less income tax paid and a decreased tax refund
less income tax paid and an increased tax refund

Explanation:

Analyze 401(k) contributions

Using the 401k Plans and Tax-Deferred Contributions knowledge points:

• Contributions to a traditional 401(k) are made with pre-tax dollars, which reduces your taxable income for the year.
• A lower taxable income directly results in less income tax paid overall.

Determine the effect on tax refund

• Because pre-tax contributions lower your overall tax liability, if your paycheck withholdings remain high, you will have overpaid your actual tax liability.
• This overpayment leads to an increased tax refund when you file your annual tax return.

Answer:

• More income tax paid but an increased tax return
• More income tax paid and an decreased tax refund
• Less income tax paid and a decreased tax refund
• Less income tax paid and an increased tax refund (Correct answer)