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

Which statement is true regarding contributions to qualified annuities?

1. They are taxed at withdrawal

2. They can only accept contributions from employers

3. Tax deductions are available during the contribution phase

4. Investments must be made without tax incentives

The correct answer is: Tax deductions are available during the contribution phase

The statement regarding contributions to qualified annuities that is correct is that tax deductions are available during the contribution phase. This is significant because qualified annuities are tax-deferred investment vehicles. This means that contributions made to these types of annuities can be deducted from the individual’s taxable income during the year they are made, effectively reducing the tax burden for that year. Utilizing this deduction incentivizes individuals to save for retirement through these financial products. This structure allows for the investment to grow tax-deferred until withdrawals are made, usually during retirement, at which point the withdrawals would be taxed as ordinary income. Understanding this concept is crucial because it highlights the benefits of contributing to qualified annuities as part of a retirement strategy. When considering other statements, contributions to qualified annuities are not solely limited to employer contributions, allowing for flexibility in funding. Additionally, while investments in qualified annuities can be tax-deferred, they do not need to be made without tax incentives; in fact, the tax benefits are one of the primary reasons individuals invest in these products.