Tax-advantaged accounts Exam Questions
With Correct Answers
Tax-advantaged accounts - answer✔an account that provides tax benefits for purposes of saving and
investing for retirement
tax-deferred - answer✔an account where all earnings remain untaxed until "constructive receipt"
earned income - answer✔income derived from active participation in a business, including wages,
alimony, salary, tips, commissions, and bonuses. Can be used toward IRA contribution.
Individual Retirement Account - IRA - answer✔a tax-deferred account that generally allows any
individual with earned income to contribute 100% of earned income up to the current maximum
contribution allowed on a pre-tax basis that reduces the current tax liability and allows investment
returns to compound
Traditional IRA - answer✔an individual retirement account funded typically with tax-deductible
contributions
catch-up contribution - answer✔the extra amount that a person 50 or older is allowed to contribute
annually to a retirement account
required minimum distributions - answer✔the amount that must be taken from a retirement plan to
avoid IRS penalties. Usually must occur by April 1st of the year following the individual's 70 1/2th
birthday
direct transfer - answer✔moving the proceeds of a tax-deferred account to another custodian rather
than the individual taking possession or control of the assets
rollover - answer✔moving retirement funds from a 401(k) to an IRA, or from one IRA to another.
Roth IRA - answer✔individual retirement account funded with non-deductible (after-tax) contributions.
All distributions are tax-free provided the individual is 59 1.2 and has had the account at least five years
defined contribution plan - answer✔a qualified corporate plan that defines the contribution made on
behalf of the employee, e.g. profit sharing, 401k
defined benefit pension plan - answer✔a qualified corporate plan that defines the benefit payable to
the retiree
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