Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceMedium
A company establishes a retirement plan for its employees where contributions are made with pre-tax dollars, and the earnings grow tax-deferred. Upon retirement, distributions are fully taxable as ordinary income. Which type of plan is being described?
- ARoth IRA
- BSection 401(k) Plan
- CNon-Qualified Deferred Annuity
- D529 Plan
Show answer & explanationAnswer & explanation
Correct answer: B. Section 401(k) Plan
A Section 401(k) plan is a qualified retirement plan where contributions are made on a pre-tax basis, earnings grow tax-deferred, and distributions in retirement are taxed as ordinary income. This is a classic 'tax-deferred' retirement vehicle.
Why the other options are wrong
- A. Roth IRA contributions are after-tax, and qualified distributions are tax-free.
- C. Non-Qualified Deferred Annuities are not qualified plans; contributions are after-tax, and only earnings are taxed upon withdrawal (LIFO).
- D. A 529 Plan is for education expenses, not a general retirement plan, and has different tax rules.
Qualified Retirement Plan (Traditional)
A retirement plan that meets IRS requirements, allowing for pre-tax contributions, tax-deferred growth, and taxable distributions in retirement.
- Contributions are often tax-deductible or pre-tax.
- Earnings grow tax-deferred.
- Distributions in retirement are taxed as ordinary income.
- Subject to ERISA regulations (for employer-sponsored plans).
- Examples: 401(k), 403(b), Traditional IRA.
Memory trick: Qualified plans are like a tax-deferred vault, you pay later for what you put in now.