Future Business Leaders of America (FBLA) Personal Finance Practice Test

What does tax-deferred income refer to?

1. Income that is taxed immediately

2. Income that will not be taxed

3. Income that will be taxed at a later date

4. Income that is exempt from future taxes

The correct answer is: Income that will be taxed at a later date

Tax-deferred income refers to earnings or gains on which taxes are postponed until a later date rather than being taxed immediately. This concept is commonly applied to certain types of retirement accounts, like 401(k)s or IRAs, where individuals can contribute money without paying income taxes on those contributions or the earnings they generate until they withdraw the funds in retirement. By deferring the tax liability, individuals have the opportunity to grow their investments without the immediate tax burden, allowing for potentially greater accumulation of wealth over time. The taxes owed on this income will be due when the funds are eventually taken out of the account, which often occurs when the individual is in a lower tax bracket, especially during retirement. Understanding tax-deferred income is important for tax planning and management of long-term financial growth strategies, as it impacts overall financial health and retirement savings.