Massachusetts Life Producer Practice Exam

What is a common benefit of qualified retirement plans?

1. Tax-free withdrawals

2. Guaranteed lifetime income

3. Tax-deferred growth of investments

4. High-risk investment options

The correct answer is: Tax-deferred growth of investments

Qualified retirement plans, such as 401(k)s and traditional IRAs, are designed to encourage individuals to save for retirement by offering specific tax advantages. One of the primary benefits of these plans is the tax-deferred growth of investments. This means that any earnings generated from investments within the qualified plan—such as interest, dividends, and capital gains—are not taxed in the year they are earned. Instead, taxes on these earnings are deferred until the individual withdraws funds from the plan, typically during retirement. This feature not only allows for potentially greater accumulation of wealth over time, as the investments can grow without the immediate impact of tax payments, but it also incentivizes saving for the future. Because individuals might be in a lower tax bracket in retirement, this setup can be financially advantageous as it can lead to paying less tax on the money when it is eventually withdrawn. In contrast, while tax-free withdrawals (not applicable for qualified plans unless under specific circumstances), guaranteed lifetime income, and high-risk investment options may have their own merits in different financial products, they do not universally apply or define the core advantages of qualified retirement plans in the way tax-deferred growth does.