Certified Plan Sponsor Professional (CPSP) Practice Exam

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True or False: Participants in retirement saving plans benefit from tax advantages.

True
False
Only if they contribute above a certain limit
Only for employer contributions

The correct answer is: True

Participants in retirement saving plans benefit from tax advantages because contributions made to these plans often reduce taxable income for the year in which they are made. For example, many retirement plans, such as 401(k) and traditional IRA plans, allow contributions that are either tax-deferred or tax-deductible, meaning that individuals do not pay taxes on those contributions until they withdraw funds during retirement. This tax-deferred growth allows the investments to compound over time without immediate tax implications, which can lead to a larger nest egg at retirement. In addition to deferring taxes on individual contributions, employer contributions to retirement plans typically also have tax advantages. Employers can deduct the contributions they make on behalf of employees as a business expense, while employees do not have to pay taxes on these amounts until they withdraw them. Therefore, it is accurate to state that participants in retirement saving plans generally enjoy these tax benefits, affirming that the statement is true.