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

Which of the following investment vehicles typically offers tax-deferred growth?

1. Mutual funds

2. Variable annuities

3. Stocks

4. Bonds

The correct answer is: Variable annuities

Tax-deferred growth is a feature commonly associated with certain investment vehicles, especially those designed for retirement savings. Variable annuities offer this advantage because the earnings on the investment grow without being subject to taxes until they are withdrawn. This allows the capital to accumulate more rapidly over time compared to investments that are taxed annually, as it can grow based on the full amount invested rather than a reduced amount after taxes. In the context of variable annuities, the tax-deferral benefit is particularly attractive for investors who are looking for long-term growth, as it enables them to reinvest the full amount of their earnings. It’s important to note that once the funds are withdrawn, they are subject to ordinary income tax, and if withdrawn before a certain age, there may also be penalties involved. Therefore, while mutual funds, stocks, and bonds can provide returns and may have their own tax implications, they do not offer the same structure of tax-deferred growth that variable annuities provide. For instance, mutual funds can generate taxable capital gains distributions, stocks are usually taxable on dividends and capital gains, and bonds have interest income that is typically taxable in the year it is received. This makes variable annuities distinct in their offering of tax-deferred growth