Question

When a retirement plan is tax-qualified, A A) contributions made to the plan and earnings on plan assets are exempt from federal income taxation. B) federal income taxes on contributions made to the plan and earnings on plan assets are not assessed until withdrawal at retirement. Oc) earnings on plan assets are subject to additional federal income taxes, C) including a higher tax rate. D) earnings on plan assets are subject to a lower federal income tax rate.

Answer 1

The correct response to the question is B) federal income taxes on contributions to the plan and earnings on the plan assets are not assessed until withdrawal at retirement. This tax-deferred status applies to plans like 401(k)s and 403(b)s, permitting investments to grow without immediate tax implications.

Step-by-step explanation:

When a retirement plan is tax-qualified, B) federal income taxes on contributions made to the plan and earnings on plan assets are not assessed until withdrawal at retirement. This is known as a tax-deferred retirement plan. Plans like 401(k)s and 403(b)s are common examples of this type of plan. Employers contribute a fixed amount to these plans regularly, often matched by employees, and the funds can be invested in various investment vehicles. These tax-deferred plans provide the benefit of not having to pay federal income taxes on the money saved or its earnings until the funds are withdrawn in retirement, typically at a lower tax bracket due to the retiree's reduced income.

Such plans are advantageous because they are portable; if you move to a different employer, you can take your 401(k) with you. These plans are intended to help individuals save for retirement and potentially protect against the inflation costs that can erode traditional pension value. It's vital to note that the money in these accounts will eventually be taxed, but ideally at a lower rate once the individual has retired and potentially has a lower income.

Answer 2

Option B) is correct; in a tax-qualified retirement plan, federal income taxes on contributions and earnings are deferred until the funds are withdrawn at retirement. Defined contribution plans such as 401(k)s offer tax-deferred growth and portability for workers, allowing them to invest in vehicles that may offset inflation over time.

Step-by-step explanation:

For a retirement plan to be tax-qualified, federal income taxes on contributions made to the plan and earnings on plan assets are typically deferred until the individual withdraws the funds at retirement. Option B) is therefore the accurate description. In defined contribution plans such as 401(k)s and 403(b)s, both the employer and employee may contribute to the worker's retirement account regularly. The contributions are invested in various investment vehicles and are tax-deferred, which means the plan assets grow on a tax-deferred basis and taxes are not due until distribution at retirement age.

Furthermore, these types of plans are portable, allowing the participant to take their plan with them if they switch employers. This means that employees not only defer taxes but potentially can also reduce the impact of inflation by investing in vehicles that offer real rates of return over time.