SIE (Securities Industry Essentials) Practice Exam

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Assuming no withdrawals, on what amount will a 27 year old investor be taxed in 2021 after contributing $15,000 into their 401k and earning a gain of 7%?

$0
$15,000
$1,050
$16,050

The correct answer is: $0

Explanation On the surface, it may seem counterintuitive that the correct answer is $0, as the investor has contributed $15,000 and earned a gain of 7%, totaling $16,050. However, the important phrase in this question is "assuming no withdrawals." This means that the investor has not made any withdrawals from their 401k plan, and therefore has not realized any taxable income. At retirement age, when the investor begins making withdrawals from their 401k, they will be taxed on the amount withdrawn at their current tax rate. This is an important incentive for individuals to contribute to retirement plans, as it allows them to save money on taxes by deferring taxes until retirement age. Options B, C, and D are incorrect because they do not take into account the fact that there are no withdrawals made, and they also do not consider the tax-deferred nature of 401k plans.