Tax Advantages and Loan Options for Retirement Plans and Flexible Spending Accounts

B

The correct answer is B. Borrow.

Tax-deferred retirement plans, such as 401(k)s and IRAs, allow individuals to save for retirement on a tax-deferred basis. This means that contributions are made with pre-tax dollars, and taxes are not paid until the funds are withdrawn in retirement.

Flexible spending accounts (FSAs) allow individuals to set aside pre-tax dollars to pay for certain qualified expenses, such as healthcare or dependent care costs. This reduces the individual's taxable income and thus lowers their overall tax burden.

Some retirement plans, such as 401(k)s, may allow individuals to borrow against the funds they have saved in the plan. This means that the individual can take out a loan from their retirement account, which they must pay back with interest. The advantage of borrowing against a retirement plan is that the individual is borrowing from themselves and paying themselves back, rather than borrowing from a lender and paying interest to that lender. Additionally, the interest paid on the loan goes back into the individual's retirement account, further increasing their savings.

However, it is important to note that borrowing from a retirement plan should generally be a last resort, as it can reduce the individual's retirement savings and may have tax implications if the loan is not paid back on time. Additionally, some retirement plans may have specific rules and restrictions on borrowing against them, so individuals should check with their plan administrator before taking out a loan.