Tax-Advantaged Investing Flashcards

What is a Traditional IRA?

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.

What makes a Roth IRA different from a Traditional IRA?

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.

What is the 2025 annual contribution limit for an individual IRA (Traditional or Roth) for those under age 50?

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.

What is a 401(k) plan?

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.

What is an employer match in a 401(k)?

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.

What penalty typically applies to early withdrawals from a Traditional IRA before age 59½?

Answer: 10% early withdrawal penalty plus ordinary income taxes on the amount withdrawn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IRA before age 59½ generally triggers a 10% early withdrawal penalty in addition to paying ordinary income tax on the withdrawn amount.