Advanced Diploma of Financial Planning (ADFP) Practice Test

Which of the following is a common exception to the income tax treatment of distributions from tax-advantaged accounts?

1. Lump-sum distributions from treasury bonds

2. Roth IRAs and employer securities

3. Pensions and traditional IRAs

4. Social security payments

The correct answer is: Roth IRAs and employer securities

Roth IRAs and employer securities represent a common exception to the income tax treatment of distributions from tax-advantaged accounts due to their unique tax structures. Roth IRAs allow for tax-free growth and tax-free withdrawals in retirement, provided certain conditions are met, such as the account holder being at least 59½ years old and having held the account for at least five years. This structure contrasts significantly with traditional IRAs and pensions, where distributions are typically subject to ordinary income tax upon withdrawal. Employer securities, often associated with retirement plans like 401(k)s, may also have preferential tax treatment, especially if they are held within the plan until the employee is eligible to retire and take distributions. These rules help facilitate tax efficiencies for individuals as they prepare for retirement. In the context of the other options, lump-sum distributions from treasury bonds and pensions or traditional IRAs generally do not have such exceptions in terms of tax treatment and are typically subject to normal income tax upon withdrawal. Social security payments, while they can be partially taxable depending on the overall income level of the recipient, do not fall under the category of distributions from tax-advantaged accounts. Therefore, the unique tax treatment associated with Roth IRAs and certain employer securities highlights the correct answer