IRA: Which statement is true?

IRA: Which statement is true?

• A. An account in which earned income can be set aside in a tax-deferred retirement savings plan.
• B. A short-term savings account with no tax benefits.
• C. A tax-free savings plan for current expenses.
• D. A plan that guarantees fixed returns regardless of market performance.

Answer: (A)

An IRA is a retirement account that provides tax advantages by letting you set aside earned income and have it grow with tax deferral until you withdraw in retirement. This description fits the statement that describes an account in which earned income can be placed in a tax-deferred retirement savings plan. The other options miss the retirement-savings purpose or the tax treatment: a short-term savings account with no tax benefits isn’t designed for retirement tax planning; a tax-free savings plan for current expenses doesn’t describe how IRAs are taxed and used; and a plan that guarantees fixed returns ignores how investments in IRAs involve market risk and typically do not offer guaranteed fixed returns.

An IRA is a retirement account that provides tax advantages by letting you set aside earned income and have it grow with tax deferral until you withdraw in retirement. This description fits the statement that describes an account in which earned income can be placed in a tax-deferred retirement savings plan. The other options miss the retirement-savings purpose or the tax treatment: a short-term savings account with no tax benefits isn’t designed for retirement tax planning; a tax-free savings plan for current expenses doesn’t describe how IRAs are taxed and used; and a plan that guarantees fixed returns ignores how investments in IRAs involve market risk and typically do not offer guaranteed fixed returns.