Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

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True or False: Earnings generated in a qualified retirement plan are tax-free.

True
False
Only before withdrawal
Only for Roth accounts

The correct answer is: False

In a qualified retirement plan, earnings are typically tax-deferred rather than tax-free. This means that while the funds are in the plan, any earnings from interest, dividends, or capital gains are not taxed. However, once withdrawals are made, these earnings are subject to income tax at the individual's current tax rate. Therefore, the statement that earnings generated in a qualified retirement plan are tax-free is not accurate. Tax-free treatment applies primarily to Roth accounts, where qualified distributions can be withdrawn tax-free, but this does not extend to the general category of qualified retirement plans. Thus, the correct understanding is that while earnings can grow without immediate taxation, they are not entirely tax-free and will incur tax liability upon withdrawal from a traditional qualified retirement plan.