Chapter 11 Finance

If your company provides a 100% match up to 6%, how much should you personally contribute to your 401(k) if your earn $35,000 (not including the money the company contributed)? a. $1,750 b. $2,100 c. $4,600 d. $6,900

$2,100 0.06 x $35,000 = $2,100

If you contribute $2,300 to your 401(k) and your company matches up to 3%, how much is in the account (assume you have not gone over the 3% match)? a. $1,150 b. $2,300 c. $4,600 d. $6,900

$4,600 $2,300 x 2 = $4,600

How much is the maximal annual contribution of the IRA for income earners?

$5,000

Never save for college using:

1. Never save for college using insurance. 2. Never save for college using savings bonds (only earn 5 - 6%). 3. Never save for college using pre-paid tuition.

After five years, you can make tax-free, penalty-free withdrawals of 100% under these conditions:

1. Over 59 and half years old 2. Because of death or disability 3. First-time home purchase (max $10,000)

When is the only time that you should roll over to a Roth?

1. You have over $700,000 by age 65. 2. You can afford to pay the taxes separately, not from the IRA. 3. You understand all the taxes will become due on the rollover amount.

A self-employed person may deduct up to __________% of their net profit on the business by investing in a SEPP

15%

What are the baby steps?

1: $1000 emergency fund 2: debt snowball 3: 3-6 months expenses in emergency fund 4: invest 15% of your household income into Roth IRA and pre-tax retirement plans

What can you save with ESA?

2,000$ per year per child TAX FREE

If Micayla and Joe are debt-free, how much should they be investing in retirement plans if their combined income is $145,000? a. $14,500 b. $21,000 c. $21,750 d. $43,500

21,750 .15 x $145,000 = $21,750

A plan offered by a corporation to its employees and allows individuals to set aside tax-deferred income; in some cases, employers will match their contribution

401k

What is the typical retirement plan found in most jobs?

401k

A plan similar to a 401(k) plan and offered by non-profit organizations

403b

What is the typical retirement plan found in non profit orgs?

403b

A plan established by state and local governments for tax-exempt government agencies; employees are allowed to make salary deferral contributions

457

The __________is deferred compensation, which means you are deferring or putting off compensation. Usually this is available for government employees.

457

A tax-deferred savings plan that is generally sponsored by a state; these are professionally managed investments

529

What can you use next if you want to save more or if you don't meet the income requirements for ESA?

529

Which of the following is not a retirement plan? a. 529 b. 401(k) c. 403(b) d. 457

529

Taken from your net income after taxes; no taxes due upon withdrawal

After-tax contributions

Which is not a benefit of the Roth IRA? a. Grows tax-free b. Allows unlimited contributions c. Provides penalty-free withdrawals under certain circumstances d. Offers more choices

Allows unlimited contributions

Never save for college using: a. Pre-tax dollars b. Pre-paid tuition c. Savings bonds d. Both b and c

B and C

What is baby step 4?

Baby Step 4: Invest 15% of household income into Roth IRAs and pre-tax retirement. 1. Fund the 401(k) or other employer plan up to the match (if applicable). 2. Above the match, fund Roth IRAs. If there is no match, start with Roth IRAs. 3. Complete 15% of income by going back to 401(k) or other company plans.

An Educational Savings Account (ESA) is used for ______. a. Retirement b. College c. An emergency fund d. A new car

College

What is baby step 5?

College fund for your kids, first by ESA (nicknamed "education IRA")

Baby Step 5 is: a. 3 - 6 months of expenses saved b. College funding c. 15% of household income into retirement plans d. The debt snowball

College funding

What should you do with your retirement accounts when you leave a company? a. Cash them out b. Fund deposit c. Fund shift d. Direct transfer

Direct transfer

Should we use GIC to fund our pension plans?

Do not use a Guaranteed Investment Contract (GIC) or bond funds to fund your plan. This is like a C.D. inside of your 401(k). You will only make about 3 - 4% and it will not help you win long-term.

What is used for college savings?

ESA

An after-tax college fund that grows tax-free for educational uses; eligibility based on parents' annual income

ESA (education savings account)

What are the different college funding options?

ESA 529 UGMA UTMA

T/F: An IRA is a specified type of investment

False

T/F: Investing 5,000 pre-tax is the same as investing 5,000 after tax

False

T/F: When you leave a company, don't move your $ from that retirement account

False

T/F: savings bonds are a good way to save for college

False

T/F: IRA is a type of investment bank

False It's the tax treatment on any type of investment

WTF is Federal thrift plan?

For federal government workers who have the standard thrift plan, we recommend 60% in the C fund, 20% in the S fund and 20% in the I fund.

How to maximize your retirement savings

Fund your 401k if your company matches the contribution Then fund Roth IRAs Invest in 401k until your reach 15% of your income

What is GIC?

Guaranteed Investment Contract

What are "qualified plans"?

IRA (individual retirement arrangement) SEPP (simplified employee pension plan) 401k, 403b, 457

Never borrow on your retirement plan.

Never

Are there taxes when you cash out a Roth IRA?

No

Taken from your gross income before taxes; taxes due upon withdrawal

Pre-tax contributions

What should you do with your retirement plan when you leave a company?

Roll over the retirement plan to an IRA with a direct transfer

The _____ IRA grows tax-free. a. Roth b. Traditional c. Original d. Life insurance

Roth

Which IRA grows tax-free?

Roth

An IRA funded with after-tax dollars and grows tax free

Roth IRA

What is a retirement plan for self employed people?

SEPP

A pension plan in which both the employee and the employer contribute

SEPP (simplified employee pension plan)

What are the current limitations on a SEPP?

The maximum deductible amount is 25% of your total income, up to a $49,000 limit.

A tax-deferred arrangement in which growth is not taxed until money is withdrawn; contributions to an IRA are often tax-deductible

Traditional IRA

T/F: Most companies have completely done away with pension plans

True

T/F: Once the emergency fund is in place, you should start retirement and college funding aka wealth building

True

T/F: Pre-tax contributions are ones the government lets you invest money in before taxes have been taken out of your income

True

T/F: Roth IRA is an after-tax IRA that grows tax-free and has more flexibility

True

T/F: Roth IRA is best if you're in a higher bracket at retirement

True

T/F: Roth IRA offers tax free and penalty free withdraws at any time

True

T/F: When it comes to IRAs, everyone with an earned income is eligible

True

T/F: You should fund your plan whether your company matches it or not

True

T/F: never borrow money from your retirement plan

True

Legislation that provides a tax effective manner of transferring property to minors without the complications of trusts or guardianship restrictions

UGMA (uniform gift to minors act)

Legislation similar to the UGMA that extends the definition of gifts to include real estate, paintings, royalties and patents

UTMA (Uniform transfer to minors act)