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

True or False: Earnings generated in a non-qualified retirement plan are tax-deferred.

1. True

2. False

3. Only during retirement

4. Depends on the investment type

The correct answer is: True

When assessing whether earnings generated in a non-qualified retirement plan are tax-deferred, the answer is true. Non-qualified retirement plans allow employees to defer paying taxes on the earnings accrued within the plan until withdrawals are made, typically during retirement. This contrasts with qualified plans, which have specific tax advantages and must meet certain IRS requirements, but non-qualified plans provide flexibility and do not have the same regulatory structure. It's important to recognize that tax deferral applies to the growth within the plan until funds are distributed. At that point, the distributions are subject to standard income tax. This characteristic makes non-qualified plans appealing for high-income earners or executives, as they can accumulate a significant amount of savings without immediate tax implications. In this context, the incorrect options address scenarios that do not apply to non-qualified plans: stating false implies immediate taxation on earnings, while saying it only applies during retirement neglects the deferral aspect prior to withdrawals. Meanwhile, the investment type variability is irrelevant in determining the general tax-deferred nature of non-qualified plans.