Certified Plan Sponsor Professional (CPSP) Practice Exam

What are the two types of employee contributions made on an after-tax basis?

1. Roth and SIMPLE contributions

2. Roth and Voluntary after-tax contributions

3. Traditional and Roth contributions

4. Voluntary and mandatory contributions

The correct answer is: Roth and Voluntary after-tax contributions

Roth and Voluntary after-tax contributions are both categorized as contributions made on an after-tax basis, which is the key reasoning behind the selection of this answer. Roth contributions are designed to allow employees to contribute to a retirement plan with post-tax dollars, meaning taxes are paid at the time of the contribution rather than at withdrawal. This feature is attractive to many employees, especially those who anticipate being in a higher tax bracket during retirement. Voluntary after-tax contributions also involve contributions made with after-tax dollars but typically refer to additional contributions employees can choose to make beyond what is offered through standard pre-tax or Roth options. These contributions increase the total savings available for retirement and can often be withdrawn without penalty or taxes on the earnings, depending on the plan's stipulations. This distinction emphasizes how both contributions effectively allow employees to save for retirement using dollars that have already been taxed, providing them with tax diversification options in the future.