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

question 10

Multiple Choice

Jenny (35 years old) is considering making a one-time contribution to either a traditional 401(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) 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.
• B) 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.
• C) Jenny will earn the same after-tax rate of return no matter which plan she contributes to.
• D) Jenny is not allowed to make a one-time contribution to either plan.

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Definitions:

Associations

Connections or relationships between thoughts, ideas, or concepts.

Unconscious

According to Freud, a reservoir of mostly unacceptable thoughts, wishes, feelings, and memories. According to contemporary psychologists, information processing of which we are unaware.

Serial Position Effect

A phenomenon in memory that suggests people tend to recall the first and last items in a series best, and the middle items worst.

Recall Best

The tendency to remember and bring to mind the most significant or vivid memories more easily than others.