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

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What is a Tax-Sheltered Annuity also known as?

Employer-sponsored plan
Qualified contract
Non-qualified investment
Retirement savings account

The correct answer is: Qualified contract

A Tax-Sheltered Annuity is commonly known as a qualified contract. This designation is important because it indicates that the annuity meets specific IRS guidelines that allow for tax-deferred growth of earnings until withdrawals are made, usually at retirement. Qualified contracts are usually associated with employer-sponsored retirement plans such as 403(b) plans, which are typically available to certain employees of public schools and tax-exempt organizations. The term "qualified" specifically denotes that these contracts are established under section 401(a), 403(b), or similar sections of the tax code, allowing individuals to enjoy tax benefits that are not available with non-qualified investments. As such, the investments in these contracts are sheltered from income taxation until they are distributed, which aligns perfectly with the characteristics of a Tax-Sheltered Annuity. This tax strategy is crucial for retirement planning as it allows for compounded growth without the immediate tax implications that would otherwise reduce investment efficiency.