Chapter 15

In​ 2017, a worker received 1 Social Security credit for every​ ________ dollars in​ earnings?

$1,300

Alex works for a company with a​ 401(k) plan. He currently earns​ $80,000 in gross salary and contributes​ 8% of his gross salary into his​ 401(k) account. If his marginal tax rate is​ 33%, how much income tax liability is he saving by participating in his​ 401(k)?

$2,112

A​ 401(k) plan is a tax−deferred retirement savings plan in which employees of private corporations may contribute a portion of their wages up to a maximum amount set by law.

True

Because inflation makes goods and services cost more over​ time, one would be wise to always plan for inflation when planning​ one's retirement.

True

Consistently saving a little money for retirement when you are in your twenties is much better than saving a lot more money when you are in your fifties.

True

For low income senior households Social Security is a very important financial asset.

True

If all contributions to your IRA are tax​ deductible, then all withdrawals from your IRA will be​ taxed, unless​ you're just moving your money into another IRA.

True

It is a good idea to start saving for retirement as early as possible to take advantage of compounding returns on your savings.

True

One of the advantages to a traditional IRA is that it allows you to make a penalty−free withdrawal to purchase your first home.

True

One of the first steps in planning for your retirement is figuring out just what you want to do when you retire.

True

The Roth IRA does not require that distributions begin by age 70​ 1/2.

True

The big disadvantage with a defined−contribution plan is that you​ don't know in advance exactly how much money you can plan on for retirement income.

True

The size of your Social Security benefits are determined by your number of years of​ earnings, your average level of​ earnings, and an adjustment for inflation.

True

You should take advantage of any matching your company is willing to do for your​ 401(k).

True

​401(k) and​ 403(b) plans are the most common retirement plans these days. What are the big advantages to employees with these​ plans?

You​ don't pay taxes on money contributed to​ 401(k) plans. Many firms contribute an employer​ match, which represents a​ 100% risk−free return to the employee. Earnings on your retirement account are tax deferred.

A​ ________ is defined by the fact that your employer provides all the funds for the retirement​ plan, without any contribution from you.

noncontributory retirement plan

A defined benefit retirement plan is also known as​ a/an

pension plan.

If your pension fund contained a provision that allowed employees who were leaving the company to retain and transfer any pension benefits earned to another pension​ plan, it would be said to have

portability.

You are participating in a pension plan where the​ company's contributions vary from year to​ year, depending on the​ firm's performance. This is an example of​ a(n)

profit−sharing plan.

If you receive​ $100,000 in retirement and are in a​ 26% tax​ bracket, how much will you receive after​ tax?

$74,000

Jahwana works for a large corporation with a​ 401(k) retirement plan. The company matches dollar for dollar the first​ 5% of the​ employee's salary contributed to the​ 401(k). Jahwana currently earns​ $40,000 in gross salary and she currently contributes​ 15% of her salary into her​ 401(k). How much money in dollars is the total contribution to her account every​ year?

$8,000

Jose does not have a retirement plan at work. He currently earns​ $30,000 in salary and is in the​ 15% marginal tax bracket. If he contributes the maximum contribution of​ $5,500 to his traditional​ IRA, how much money will he save on his income tax​ liability?

$825

To be eligible for Social Security​ benefits, you receive one credit for every​ $1,200 in wages that you​ earn, up to 4 credits per year. How many total credits do you need to qualify for​ benefits?

40

​A(n) ________ is a tax−deferred retirement plan that is essentially the same as a​ 401(k) plan, except that it is aimed at employees of schools and charitable organizations.

403(b)

According to the​ text, approximately what percent of Americans are covered by Social​ Security?

95

What is a​ 401(k) "catch​ up" provision? Who can use​ it? Why?

A​ "catch up" provision allows taxpayers over the age of 50 to make additional​ tax-deferred contributions to​ 401(k) plan to​ "catch up" their savings to a more appropriate level. The annual​ "catch up" amount for 2014 was​ $5,500, indexed to inflation.

Lori Watts favors the traditional IRA over the Roth IRA. What advantage does the traditional IRA have over the​ Roth?

Contributions are likely to be fully or partially tax deductible.

How does the traditional IRA differ from the Roth​ IRA? What characteristics are common to​ both?

Differences: - money grows tax-free in Roth IRA (money only grows tax-deferred in traditional IRA) - make tax-free and penalty-free withdrawals after age 59 1/2 with Roth IRA (withdrawals are taxed as current income after age 59 1/2 with traditional IRA) Similarities - offer some tax advantages - allow contributions of $5500 under age of 50 and $6500 over the age of 50

Which of the following benefits is not provided by Social​ Security?

Education

By​ law, everyone must contribute the maximum amount into their​ 401(k) plans at work.

False

Contributions to Roth IRAs are tax deductible.

False

For someone wanting to minimize the taxes they are paying​ now, a Roth IRA would be preferable to a traditional IRA.

False

One of the best things about retirement is that retirees​ don't have to pay income taxes once they retire.

False

With a Roth​ IRA, after five years you can make withdrawals before age 59​ 1/2 without a penalty but you must pay taxes on the withdrawals.

False

With a traditional IRA and a Roth​ IRA, you can make withdrawals at any time with no penalties.

False

The system of Social Security is based on young working people paying taxes to support older retired people. The dependency ratio is the number of workers to retirees. Forty years ago it was 16 workers for every one retiree. What will happen to this ratio by the year​ 2048?

It will decline to 2 workers for every 1 retiree.

Anyone can open up an IRA account but not everyone may get tax−advantages from it because there are income limitations.

True

Social Security is a system where current​ workers' pay taxes that are used to pay current​ retirees' benefits. How is Social Security​ funded?

Payroll taxes on employers up to a salary cap Payroll taxes on employees up to a salary cap

Frances McClurg favors the Roth IRA over the traditional IRA. What advantage does the Roth provide over the traditional​ IRA?

She can avoid income taxes when she withdraws.

With a​ ________, you, and usually your​ employer, pay funds into your retirement plan.

contributory retirement plan

Frank is considering a new job. However he is concerned about his pension fund. He knows that​ ________ which is the requirement that he must work for his firm for a specified period of time prior to gaining ownership of the retirement contributions made by his employer has to be met first.

vesting

Erica works for a company with a​ 401(k) plan. The company matches at​ $0.50 on the dollar the first​ 6% of the​ employee's salary contributed to the​ 401(k). If Erica earns​ $90,000 and contributes​ 12% of her​ salary, how much will the employer match be in dollars for the​ year?

​$2,700