NCLC Employee Development Practice Test

This question tests how a 401(k) is taxed. In a traditional 401(k), contributions are made with pre-tax dollars, reducing your current taxable income. The money grows tax-deferred, so you don’t owe taxes on investment gains until you withdraw in retirement. When you take distributions, they’re taxed as ordinary income, and early withdrawals before the eligible age can incur penalties.

So the statement that a 401(k) plan is commonly funded with pre-tax contributions best describes its tax treatment. The other options don’t fit: a fixed-benefit plan describes a defined-benefit pension, not a 401(k); a 401(k) is funded by contributions (often including employer matching), not by no contributions; and it’s available to many non-executive employees, not just executives.