Basics Beginner: Introduction to Taxes and Investments

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1.
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 A tax-sheltered account lets interest grow within your account without taxes until it is withdrawn. Once it is withdrawn, it may be taxed.
2.
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.
3.
A reasonably intelligent person who studies the tax code from time to time can probably make good decisions about how to shelter investment income from taxes.
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False. Even the simplest workplace retirement plan can have tax implications that require expert advice.
4.
Investments in which earnings build tax-free until you withdraw them are called _______.
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Tax-deferred. "Tax-deferred" means that earnings build tax-free until you withdraw them.
5.
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.