Accredited Wealth Management Advisor (AWMA) 1 Practice Exam

The statement that the employer does not pay taxes on taxable earnings as they accumulate is accurate regarding how a rabbi trust operates. In a rabbi trust, the assets set aside to cover deferred compensation for an employee are not considered to be owned by the individual until they are distributed. This means the earnings within the trust can grow on a tax-deferred basis, allowing the trust’s investments to accumulate value without immediate tax implications for the employer.

In practice, this means that any income generated or appreciation of the assets within the trust is not subject to taxation at the corporate level until distributions are made to the employee. This structure benefits the employer by allowing long-term investment growth without the immediate burden of tax liabilities associated with those earnings.

Other statements do not hold true for a rabbi trust. For instance, assets in a rabbi trust can be subject to creditors in bankruptcy proceedings, and distributions from the trust cannot typically be rolled over into an IRA as they are considered deferred compensation rather than retirement accounts. Additionally, while the employer may hold the assets in the trust, they are technically set aside for specific employee compensation and not available for general use by the employer. This distinct separation helps ensure that the funds serve their intended purpose of providing deferred compensation.