Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

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Which type of annuity allows for pre-tax contributions?

Qualified annuity
Non-Qualified annuity
Both types of annuities
Neither type of annuity

The correct answer is: Qualified annuity

A qualified annuity allows for pre-tax contributions, making it suitable for retirement savings. Contributions to qualified annuities are often made through plans that comply with IRS requirements, such as retirement accounts like 401(k)s or IRAs. The key feature of qualified annuities is that individuals can deduct their contributions from taxable income, which lowers their current tax liability. Taxes on the investment gains and future distributions are then deferred until withdrawals are made, typically in retirement when individuals may be in a lower tax bracket. Non-qualified annuities, on the other hand, involve after-tax contributions, meaning that the money used to fund these annuities has already been taxed. The investment growth within non-qualified annuities is tax-deferred, but the initial contributions do not provide a tax deduction. Knowing this distinction helps individuals understand the tax implications associated with each type of annuity and supports better financial planning for their retirement.