What is the taxation status of a pre-tax contribution at the moment of withdrawal?

When a participant makes pre-tax contributions to a 401(k) plan, those contributions are deducted from their gross income, meaning the participant does not pay income taxes on that money at the time it is contributed. However, when the funds are withdrawn, the amount that was contributed pre-tax is indeed taxed as ordinary income at that point.

This taxation occurs because the pre-tax contributions were meant to defer taxes until the funds are accessed, typically during retirement when the individual may be in a lower tax bracket. Therefore, when a participant withdraws these contributions, they are subject to income tax, aligning with the concept that the tax obligation is inherent when the pre-tax funds are utilized.

The other choices do not accurately reflect the tax implications.

• Not taxed would imply that no income tax is due at withdrawal, which is incorrect for pre-tax accounts.

• Deferred taxation until retirement suggests that taxes are postponed, but it does not clarify that taxes are indeed due upon withdrawal.

• Partially taxed could imply only a portion of the amount is taxed, which misrepresents the full income tax liability that arises when withdrawing pre-tax contributions.

Thus, the correct assessment of the taxation status of pre-tax contributions at the moment of withdrawal is that they are