Which of the following is a common reason for investing in a 401(k) plan?

Investing in a 401(k) plan is commonly associated with the significant tax advantages it provides. Contributions made to a traditional 401(k) are often made pre-tax, which means they reduce your taxable income for the year. This can be beneficial because it allows you to defer taxes on the money you invest until you withdraw it during retirement, potentially at a lower tax rate. Moreover, any investment growth—such as interest, dividends, or capital gains—accumulates tax-free while the money remains in the account.

This tax-deferral feature incentivizes individuals to save for retirement, as it can lead to a larger nest egg due to the compounding of returns without the immediate tax burden. While liquidity, the potential for high returns, and management fees are all important considerations when evaluating a retirement plan, the primary appeal of a 401(k) is its tax advantages, making it a favored choice for many workers looking to secure their financial future.