Which of the following taxes is most relevant to understanding if we should save for retirement using a tax-deferred or tax-exempt account?

Question

BlackTom AI · Accepted Answer

Question restatement: The prompt asks which tax category is most relevant to deciding whether to save for retirement in a tax-deferred or tax-exempt account.
Option 1: 'Taxes on purchases' — This refers to sales or excise taxes paid when buying goods and services. While important for overall budgeting, it does not directly influence the choice between tax-deferred and tax-exempt retirement accounts, so this option is not relevant to the retirement tax treatment decision.
Option 2: 'Taxes on earnings' — This is the key factor. The tax treatment of investment earnings (interest, dividends, capital gains) inside retirement accounts determines whether taxes will be paid now or later, and at what rate. Tax-deferred accounts delay taxation on earnings until withdrawal, typically during retirement, while tax-exempt accounts allow earnings to grow without tax, though contributions may be taxed differently. Therefore, this option directly informs the decision between tax-deferred versus tax-exempt structures.
Option 3: 'Taxes on wealth' — This concerns taxes on accumulated wealth, such as estate or inheritance taxes, which influence long-term estate planning but are not the central consideration for selecting retirement account tax treatment based on when earnings are taxed.
Summary: The choice hinges on how earnings within the retirement accounts are taxed, making 'Taxes on earnings' the most relevant category for deciding between tax-deferred and tax-exempt retirement accounts.

BU.232.730.81.SU25 Final Exam

Which of the following taxes is most relevant to understanding if we should save for retirement using a tax-deferred or tax-exempt account?

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