What type of retirement plan often provides tax advantages to employees?

The type of retirement plan that often provides tax advantages to employees is the defined-contribution plan. These plans, such as 401(k) and 403(b) plans, allow employees to contribute a portion of their earnings to their retirement savings, often with the employer matching a portion of those contributions. The contributions made to these plans can reduce the taxable income of the employee for the year in which they are made, offering immediate tax benefits.

Additionally, the funds in a defined-contribution plan grow tax-deferred until withdrawal, which means that taxes are deferred until the funds are accessed during retirement, typically when the individual may be in a lower tax bracket. This structure helps incentivize saving for retirement while providing a way to accumulate wealth without the burden of immediate taxation.

In contrast, a pension plan provides set retirement benefits based on salary and years of service but may not offer the same flexibility in terms of employee-controlled contributions or immediate tax advantages on individual contributions. Social Security, while a significant source of retirement income, is a government program rather than a plan individuals can contribute to directly in a way that provides immediate tax advantages. Lastly, a Roth IRA offers unique tax advantages, but contributions are made with after-tax dollars, meaning they do not provide a tax