Basics Beginner: Introduction to Taxes and Investments

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1.
The profits realized on the sale of appreciated stocks you held for more than a year are subject to lowered tax rates.
Choose wisely. There is only one correct answer.
True. Profits made on the sale of stocks you held for more than a year are long-term capital gains, which are taxed at lower rates than regular income, including dividends and interest.
2.
Investments in which earnings are allowed to build tax-free are called ______.
Choose wisely. There is only one correct answer.
Tax-deferred. Tax-deferred investments are those in which earnings are allowed to build tax-free until you receive them as income.
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.
Choose wisely. There is only one correct answer.
False. Even the simplest workplace retirement plan can have tax implications that require expert advice.
4.
Which of the following is not a tax-sheltered investment you can use to compound interest?
Choose wisely. There is only one correct answer.
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.
5.
A tax-sheltered account always protects your investment interest from taxes.
Choose wisely. There is only one correct answer.
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 A tax-sheltered account lets interest grow within your account without taxes until it is withdrawn. Once it is withdrawn, it may be taxed.