Investment Tax-Advantaged Investing 2 — Questions and Answers
Question 1: What is a Health Savings Account (HSA) in the context of investing?
- A government subsidy for low-income medical expenses
- A tax-advantaged account for medical expenses that can also serve as a long-term investment vehicle (Correct answer)
- A flexible spending account that must be used within the plan year
- An insurance product that pays for hospital stays
Correct answer: A tax-advantaged account for medical expenses that can also serve as a long-term investment vehicle
An HSA offers a triple tax advantage: contributions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free, and unused funds can be invested and grow for retirement.
Question 2: What is required to contribute to an HSA?
- You must be enrolled in Medicare
- You must be covered by a High-Deductible Health Plan (HDHP) (Correct answer)
- You must be self-employed with no other coverage
- You must be age 55 or older
Correct answer: You must be covered by a High-Deductible Health Plan (HDHP)
To contribute to an HSA, you must be enrolled in an HSA-eligible High-Deductible Health Plan (HDHP) and cannot be covered by other disqualifying health insurance.
Question 3: What is a 529 plan?
- A retirement savings account for government employees
- A tax-advantaged savings plan designed to encourage saving for future education costs (Correct answer)
- A tax-deferred annuity sold by insurance companies
- A small-business retirement plan with higher contribution limits
Correct answer: A tax-advantaged savings plan designed to encourage saving for future education costs
A 529 plan is a state-sponsored, tax-advantaged savings plan where contributions grow tax-free and withdrawals are tax-free when used for qualified education expenses.
Question 4: What does 'vesting' mean in the context of a 401(k) employer match?
- The process of choosing investments within a 401(k)
- The period of time an employee must work before gaining full ownership of employer-contributed funds (Correct answer)
- The annual fee charged by the 401(k) plan administrator
- The automatic increase in employee contributions each year
Correct answer: The period of time an employee must work before gaining full ownership of employer-contributed funds
Vesting refers to the schedule by which an employee earns full ownership of employer-matched 401(k) contributions — leaving a job before being fully vested may result in forfeiting some employer contributions.
Question 5: What is a Roth 401(k)?
- A 401(k) plan only available to Roth IRA holders
- A 401(k) plan option that allows after-tax contributions so qualified withdrawals are tax-free (Correct answer)
- A 401(k) plan with no contribution limits offered by some employers
- A self-directed 401(k) that invests only in index funds
Correct answer: A 401(k) plan option that allows after-tax contributions so qualified withdrawals are tax-free
A Roth 401(k) is an employer-sponsored plan that combines the high contribution limits of a 401(k) with the after-tax, tax-free withdrawal benefits of a Roth IRA.
Question 6: What is a Required Minimum Distribution (RMD)?
- The minimum amount required to open a retirement account
- The mandatory annual withdrawal that the IRS requires from most retirement accounts starting at age 73 (Correct answer)
- The minimum employer match required by law in a 401(k)
- The minimum investment needed to qualify for tax-deferred growth
Correct answer: The mandatory annual withdrawal that the IRS requires from most retirement accounts starting at age 73
RMDs are minimum amounts the IRS requires you to withdraw annually from traditional IRAs and employer-sponsored retirement plans beginning at age 73, ensuring the government collects deferred taxes.
Investment Tax-Advantaged Investing 2
What is a Health Savings Account (HSA) in the context of investing?