Which of the Following Means That You Will Owe Taxes Only When You Begin to Take Distributions From the Account?

Which of the Following Means That You Will Owe Taxes Only When You Begin to Take Distributions From the Account?

A) Tax Deductible

B) Tax Deferred

C) Tax Exempt

D) Tax Preferred

The correct answer is B) Tax Deferred. 

Tax deferred means you will owe taxes only when you begin to take distributions from the account. In tax-deferred accounts like 401(k)s or IRAs, taxes on contributions and earnings are postponed until withdrawal, typically during retirement. This deferral allows investments to grow faster over time. Tax Deductible (A) implies deductions on current taxes; Tax Exempt (C) means no taxes ever; Tax Preferred (D) suggests favorable tax treatment but not necessarily deferred.

What Does Tax-Deferred Mean?

Tax-deferred means investment earnings accumulate without immediate taxation until the investor accesses the profits. It allows for tax-free growth until withdrawal, leading to potential savings. Taxes are postponed until the investor receives the funds, providing financial advantages over time.