NAB Estate and Tax Planning 1 — Questions and Answers
Question 1: What is the purpose of a will?
- To specify how your assets should be distributed after death and name guardians for minor children (Correct answer)
- To avoid paying taxes
- To transfer property immediately
- To open a bank account
Correct answer: To specify how your assets should be distributed after death and name guardians for minor children
A will is a legal document expressing your wishes for asset distribution, guardianship of children, and appointment of an executor after your death.
Question 2: What is the difference between a traditional IRA and a Roth IRA?
- Traditional IRA contributions are tax-deductible now but taxed on withdrawal; Roth contributions are after-tax but withdrawals are tax-free (Correct answer)
- They are identical
- Only traditional IRAs earn interest
- Roth IRAs have no contribution limits
Correct answer: Traditional IRA contributions are tax-deductible now but taxed on withdrawal; Roth contributions are after-tax but withdrawals are tax-free
Traditional IRAs offer upfront tax deductions with taxed withdrawals, while Roth IRAs use after-tax money but provide tax-free growth and withdrawals in retirement.
Question 3: What is a tax deduction?
- An amount subtracted from taxable income, reducing the overall tax owed (Correct answer)
- A payment from the government
- A penalty for underpaying taxes
- A type of tax credit
Correct answer: An amount subtracted from taxable income, reducing the overall tax owed
Tax deductions reduce your taxable income, which in turn lowers the amount of tax you owe. Common deductions include mortgage interest, charitable contributions, and certain business expenses.
Question 4: What is the difference between a tax deduction and a tax credit?
- A deduction reduces taxable income; a credit directly reduces the amount of tax owed dollar-for-dollar (Correct answer)
- They are the same thing
- Credits are always larger than deductions
- Deductions are more valuable than credits
Correct answer: A deduction reduces taxable income; a credit directly reduces the amount of tax owed dollar-for-dollar
Tax credits are generally more valuable because they directly reduce tax liability dollar-for-dollar, while deductions only reduce the income subject to tax.
Question 5: What is a beneficiary designation?
- A person or entity you name to receive assets from accounts like life insurance or retirement plans upon your death (Correct answer)
- A bank employee who manages your account
- A type of loan co-signer
- A tax filing status
Correct answer: A person or entity you name to receive assets from accounts like life insurance or retirement plans upon your death
Beneficiary designations on accounts like 401(k)s, IRAs, and life insurance policies override will provisions, making them critical to keep updated.
Question 6: What is capital gains tax?
- Tax on the profit earned from selling an asset for more than its purchase price (Correct answer)
- A tax on all income
- A tax only on real estate
- A tax on savings account interest
Correct answer: Tax on the profit earned from selling an asset for more than its purchase price
Capital gains tax applies to the profit (gain) realized when you sell an investment or asset for more than you paid. Rates depend on how long you held the asset.
NAB Estate and Tax Planning 1
What is the purpose of a will?