Basics Beginner: Introduction to Taxes and Investments

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1.
Which of the following is not a tax-sheltered investment you can use to compound interest?
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Municipal bonds. Tax-deferred retirement plans and deferred annuities provide compounding interest, but municipal bonds pay only simple interest. However, you can get the effect of compound interest with a municipal bond mutual fund if you reinvest the dividends.
2.
Pre-tax investments shelter your current income from taxation.
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True. The income you invest in pre-tax investments either has no tax withheld or is tax-deductible.
3.
A tax-sheltered account always protects your investment interest from taxes.
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False. A tax-sheltered account lets interest grow within your account without taxes until it is withdrawn. Once it is withdrawn, it may be taxed.
4.
Investments in which earnings are allowed to build tax-free are called ______.
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Tax-deferred. Tax-deferred investments are those in which earnings are allowed to build tax-free until you receive them as income.
5.
_______ are taxed at a relatively low rate if you hold your investments long enough.
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Capital gains. Long-term capital gains are taxed at a lower rate to encourage investment.