Multiple Choice
Which of the following best describes the difference between a tax credit and a tax deduction?
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1. Introduction to Accounting
Types of Accounting
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Which of the following investment accounts allows for tax-free withdrawals at retirement?
A
Roth IRA
B
Taxable Brokerage Account
C
Traditional IRA
D
401(k)
Verified step by step guidance1
Understand the key characteristics of each investment account listed in the problem. Focus on their tax implications, especially regarding withdrawals at retirement.
Learn that a Roth IRA allows for tax-free withdrawals at retirement, provided certain conditions are met, such as the account being held for at least five years and the account holder being at least 59½ years old.
Compare the Roth IRA to the other options: Taxable Brokerage Account, Traditional IRA, and 401(k). Note that withdrawals from a Taxable Brokerage Account are subject to capital gains tax, while Traditional IRA and 401(k) withdrawals are taxed as ordinary income.
Recognize that the Roth IRA is unique among the options because contributions are made with after-tax dollars, and qualified withdrawals are tax-free.
Conclude that the Roth IRA is the correct answer based on its tax-free withdrawal feature at retirement, which distinguishes it from the other accounts listed.
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