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Stocks 201: Stocks and Taxes

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1.
Which type of tax-advantaged account offers the potential for tax-exempt distributions?
Choose wisely. There is only one correct answer.
A Roth IRA. A Roth IRA offers tax-free distributions, as long as certain rules are met. The downside is that Roth IRAs must be funded with after-tax dollars.
2.
If you should have both large capital gains and large capital losses, what would be the most effective way to reduce taxes on the gains?
Choose wisely. There is only one correct answer.
Realize both the gain and the loss in the same year. If you did this, the losses would offset the gains. If you did either of the other two approaches, you would either be stuck with a tax bill or you might have to stretch out your losses over many years.
3.
If you buy a stock for $20 and sell it for $30, the $10 gain is a form of ordinary income.
Choose wisely. There is only one correct answer.
False. The $10 gain is a capital gain, and may be taxed differently from ordinary income; it depends on how long you held the stock.
4.
The idea behind creating a class of "qualified dividends" is to prevent _______.
Choose wisely. There is only one correct answer.
Double taxation. The idea behind making some dividends qualified is to reduce double taxation -- that is, taxation of the same profits at both the corporate and shareholder levels.
5.
All other things being equal, which would you rather own in a taxable account?
Choose wisely. There is only one correct answer.
The stock of a solid business that grows steadily over time but pays no dividend. You would prefer to own in a taxable account the stock in a solid business that grows steadily over time, but pays no dividend. This would allow you to hold the stock for a long time, deferring the realization of capital gains. Dividends would be taxable.