VirtualSC Personal Finance Practice Exam 2025 – 400 Free Practice Questions to Pass the Exam

A 401(k) plan is primarily designed to encourage employees to save for retirement by allowing them to set aside a portion of their earnings before taxes are deducted. This pre-tax contribution feature is significant because it reduces the employee's taxable income for the year in which the contributions are made, potentially leading to tax savings. Additionally, the funds in a 401(k) can grow tax-deferred until retirement, which can enhance long-term savings potential.

The other options represent misunderstandings about the nature of a 401(k). It isn't a loan against future earnings, as it involves savings that accumulate over time rather than borrowing. While participation in 401(k) plans is often encouraged, they are not mandatory for all employees; eligibility can depend on employer-specific policies. Lastly, accessing funds from a 401(k) account typically incurs penalties if withdrawals are made before age 59½, with certain exceptions. The structure of the 401(k) plan is meant to encourage long-term savings and discourage early withdrawals, further highlighting the correct answer's importance in promoting retirement savings.