Accredited Financial Counselor (AFC) Practice Exam

Retirement investments are typically made with pretax income, which refers to income that has not yet been taxed. This is particularly relevant for retirement accounts like 401(k)s and Traditional IRAs, where contributions can be made directly from income before it is subject to taxation. This approach allows individuals to reduce their taxable income for the year in which they contribute, effectively deferring taxes until they withdraw funds during retirement, when they may be in a lower tax bracket.

Pretax contributions can enhance the growth potential of retirement accounts over time, as the full amount of income can be invested and has the potential to compound without being immediately reduced by taxes. This tax advantage is a key reason why many individuals choose to fund their retirement accounts in this manner. Other types of income, such as after-tax income, capital gains, or passive income, are typically not used for this purpose in the same manner during the contribution phase.