Investment Tax-Advantaged Investing 1 — Questions and Answers
Question 1: What is a Traditional IRA?
- An investment account where contributions may be tax-deductible and growth is tax-deferred until withdrawal (Correct answer)
- A savings account insured by the FDIC with no annual limits
- A government pension plan for federal employees
- An investment account where all withdrawals are tax-free
Correct answer: An investment account where contributions may be tax-deductible and growth is tax-deferred until withdrawal
A Traditional IRA allows eligible individuals to make tax-deductible contributions, grow investments tax-deferred, and pay ordinary income tax only upon withdrawal in retirement.
Question 2: What makes a Roth IRA different from a Traditional IRA?
- Roth IRA contributions are tax-deductible; Traditional IRA withdrawals are tax-free
- Roth IRA contributions are made with after-tax dollars, but qualified withdrawals are tax-free (Correct answer)
- Roth IRAs have no contribution limits
- Roth IRAs are only available to self-employed individuals
Correct answer: Roth IRA contributions are made with after-tax dollars, but qualified withdrawals are tax-free
With a Roth IRA, you contribute after-tax dollars so there is no upfront deduction, but your investments grow tax-free and qualified withdrawals in retirement are entirely tax-free.
Question 3: What is the 2025 annual contribution limit for an individual IRA (Traditional or Roth) for those under age 50?
- $3,500
- $5,500
- $7,000 (Correct answer)
- $10,000
Correct answer: $7,000
For 2024 and 2025, the IRS allows individuals under age 50 to contribute up to $7,000 per year to a Traditional or Roth IRA.
Question 4: What is a 401(k) plan?
- A government healthcare savings account for retirees
- An employer-sponsored retirement savings plan where contributions are made pre-tax and grow tax-deferred (Correct answer)
- A type of pension plan managed entirely by the government
- A brokerage account with no annual contribution limits
Correct answer: An employer-sponsored retirement savings plan where contributions are made pre-tax and grow tax-deferred
A 401(k) is an employer-sponsored retirement plan that allows employees to contribute a portion of their pre-tax salary, reducing taxable income, with growth tax-deferred until withdrawal.
Question 5: What is an employer match in a 401(k)?
- The fee an employer charges for administering the retirement plan
- An employer contribution to an employee's 401(k) based on the employee's own contributions (Correct answer)
- The maximum amount an employee can contribute annually
- A penalty for withdrawing funds before retirement age
Correct answer: An employer contribution to an employee's 401(k) based on the employee's own contributions
An employer match is when a company contributes to an employee's 401(k) based on the employee's own contributions, such as matching 50 cents for every dollar up to 6% of salary.
Question 6: What penalty typically applies to early withdrawals from a Traditional IRA before age 59½?
- 5% penalty plus taxes
- 10% early withdrawal penalty plus ordinary income taxes on the amount withdrawn (Correct answer)
- 15% flat penalty with no additional taxes
- 20% penalty but no income tax
Correct answer: 10% early withdrawal penalty plus ordinary income taxes on the amount withdrawn
Withdrawing from a Traditional IRA before age 59½ generally triggers a 10% early withdrawal penalty in addition to paying ordinary income tax on the withdrawn amount.
Investment Tax-Advantaged Investing 1
What is a Traditional IRA?