Question

unfavorable aspects of tax deferred qualified plans include which of the following?

A) they can effectively convert what would otherwise be higher taxed capital gains (or qualified dividends) into lower taxed ordinary income

B) They are exempt from the required minimum distribution (RMD) rules

C) They can effectively convert what would otherwise be lower taxed long term capital gains (for qualified dividends) into higher taxed ordinary income

D) Money cannot be withdrawn before age 70 1/2

Answer 1

Tax deferred accounts are useful to only a certain level when it comes to stocking up all your retirement money. However, in some cases they can cause the retirement money received by you to be taxed at a much higher rate.

When money is withdrawn from a tax deferred account, it will be taxed as ordinary income in the year of withdrawal. THis means that long term capital gains which are supposed to be taxed at a much higher rate are actually taxed at ordinary income tax rate which is much higher.

The correct answer is C.