Personal Finance - Chapter 18 Study

For a traditional IRA, you can contribute up to $6,000 per year if you are under age 50 and up to _____ if you are over age 50

$7000

If you are born after 1928, you become eligible for Social Security retirement benefits if you have _____ quarters of coverage.

40

With a(n) ______, your employer makes nontaxable contributions to the plan for your benefit and reduces your salary by the same amount.

401(k) plan

annuity

A contract that provides a regular income, typically for as long as the person lives.

reverse annuity mortgage (RAM)

A mortgage in which the lender uses the borrower's house as collateral to buy an annuity for the borrower from a life insurance company; also called an equity conversion.

defined-benefit plan

A pension plan that specifies the benefits the employee will receive at the normal retirement age.

401(k) (TSA) plan

A plan under which employees can defer current taxation on a portion of their salary.

Keogh plan

A qualified pension plan in which tax-deductible contributions fund the retirement of self-employed people and their employees; also called a self-employed retirement plan.

Roth IRA

A retirement account for which contributions are not tax deductible, but earnings accumulate tax free.

defined-contribution plan

A retirement savings plan—profit sharing, money purchase, Keogh, or 401(k)—that provides an individual account for each participant; also called an individual account plan.

individual retirement account (IRA)

A special account in which the employee sets aside a portion of his or her income; taxes are not paid on the principal or interest until money is withdrawn from the account.

vesting

An employee's right to at least a portion of the benefits accrued under an employer pension plan, even if the employee leaves the company before retiring.

Which of the following are rules of the education IRA?

Contributions do not reduce current taxes. Accumulates earnings tax free. You can contribute up to $2,000 per year per child under age 18.

The education IRA is also called the ______.

Coverdell education savings account

True or false: A person must work 20 years to be eligible for Social Security retirement benefits.

False Reason: Eligibility is based on 40 quarters, or 10 years of work.

True or false: It is mandatory to start saving a large amount very early because retirement will be expensive.

False Reason: Even a small amount of initial savings will grow to be a large amount over the years, and the savings rate can be increased as you go along.

Which of the following are the disadvantages of Social Security as a source of retirement income?

Increasing pressure on system as population ages Earned income may partially offset benefits Minimum retirement age specified

Which of the following are the disadvantages of individual saving and investing as sources of income for retirement?

Penalties for early withdrawal from vehicles such as IRAs and Keogh accounts Current needs compete with future (retirement) needs Mandatory minimum withdrawals during retirement

True or false: Sources of income for many retirees are Social Security, other public pension plans, employer pension plans, personal retirement plans, and annuities.

True

True or false: The use of an emergency fund during retirement is for unexpected situations that arise.

True

True or false: When planning for a successful retirement savings plan, one must constantly focus on the plan and evaluate regularly.

True If this is not done, the plan is likely to fail because it will not change with the times.

True or false: Typical retiree housing considerations include cost of maintenance, taxes, transportation, and proximity to shopping and entertainment.

True Reason: Retirees should consider these factors along with activities, climate, and other factors.

True or false: A Roth IRA may be better for you than a traditional IRA depending on your anticipated tax bracket.

True Reason: The more money you make, the less likely that your traditional IRA contribution will be tax deductible.

True or false: The contributions and earnings of an employer-sponsored pension plan accumulate tax free until you withdraw them.

True Reason: Withdrawals from employer-sponsored pension plans are normally taxable.

Which of the following are true about the rules of a Roth IRA?

You can make contributions after age 70.5. Five years after establishing the account, you can withdraw tax-free distributions if you are at least age 59.5. Contributions are not tax deductible. Earnings accumulate tax free.

The financial decisions related to housing as you try to maximize current income and prepare for retirement might include:

a smaller house is not only less expensive, but less costly to maintain than a larger home. selling your home and buying a smaller less-expensive home.

rollover IRA

a traditional IRA that accepts distributions from a retirement plan or from another IRA.

According to the text, 75% of workers expect to live as well as, if not better than, they do now when they retire, but only 20% have ______.

begun to save

When you find a retirement city that appeals to you, you should visit the area during various times during the year to experience the year-round ______.

climate

The 403(b) and 401(k) accounts are examples of employee retirement _____-contribution plans.

defined

The very first steps of retirement planning include:

estimating your spending needs and adjusting for inflation. evaluating your planned retirement income. analyzing your current assets and liabilities.

The earnings on 401(k), 457, and 403(b) plans are tax-_____ until they are withdrawn.

exempt

Financial planning for retirement involves assessing your post retirement _____ and income and plugging any _____ you find.

goals, holes

If you work for a nonprofit or the government, you can take advantage of tax-sheltered plans, such as Section 457 and 403(b) plans, which lower your taxable _____ by the amount of your annual contribution.

income

The first step in stretching your retirement earnings is make sure you are receiving all the ___ you are entitled to.

income

One of the first steps involved with retirement planning is estimating your spending needs and adjusting for _____.

inflation

The potential ______ due to inflation is what makes planning ahead so important.

loss of buying power

Upon retirement, you might consider selling your house and buying a smaller, more easily maintained house to decrease your ______.

maintenance costs

Which of the following types of people should be investing in an annuity?

people who have fully funded all other retirement options and still have retirement income needs

Financial planning for retirement involves assessing your post-retirement needs and income and:

plugging any gaps you find.

A 401(k) plan and the nonprofit equivalent, called a 403(b) plan, are _____ reduction plans that reduce your salary by the amount of your contributions and result in a lower current tax liability.

salary

To stay within your income, you may also need to make some changes in your _____ plans.

spending

Ways retirees can uncover hidden costs before moving include:

talk to retirees and other local residents. call the local chamber of commerce. contact the province's tax department.

One of the biggest traps to avoid when considering retirement housing is to avoid hidden _____.

taxes

An IRA entails the establishment of a _____ account.

trust

To get the benefits of the power of compounding, you should begin saving for retirement while you are still _____.

young