Application 8H - 8I pg. 31 -35

Question 1

What is the financial foundation of an economy?

Answer 1

The financial foundation of an economy is the savings rate of the population.

Question 2

List the three examples of government incentives?

Answer 2

> IRAs (Individual Retirement Accounts)
Roth IRAs
ESAs (Education Savings Accounts)

Question 3

Describe the Traditional IRA

Answer 3

> allows a person to invest up to $5,500 into an IRA account per year
investment into the IRA account reduces taxable income for the year it is invested
During retirement withdrawals of contributions and interest are taxable

Question 4

Describe Roth IRAs

Answer 4

With Roth IRAs, contributions are taxable, while interest earned on the contributions is not taxable.
>Roth contributions can be withdrawn at any time without penalty

Question 5

What is the difference between a Roth IRA and a Traditional IRA?

Answer 5

With a Roth IRA, one does not receive a tax benefit when he contributes to it. However, when he decides to withdraw money from the account, he is not taxed on the amount that is withdrawn including interest earnings.

Question 6

Describe educational savings account

Answer 6

> third example of a government incentive
some parents begin saving for education of their children soon after their birth for elementary, secondary, or college education

Question 7

Describe the 401(k) plan

Answer 7

> many workplaces offer a 401(k) plan for employees
with a 401(k) plan, the employee sets aside a certain percent of his work earnings each paycheck to be put into a retirement savings plan
he also has power to say how that money is invested in the plan, whether through stocks, bonds, or a combination of those and other savings accounts
many employers will match contributions up to certain percent
the government will tax those contributions when they are withdrawn including interest earnings at retirement

Question 8

Describe the “opt out” plan

Answer 8

> With an “opt out” plan, an employer will automatically deduct money from the worker’s paycheck to be put into his 401(k) retirement fund unless he chooses to “opt out” of the plan

Question 9

Describe “opt in” plan

Answer 9

> With the “opt in” plan, one has to enroll in the plan in order to participate