Chapter 17 - Wealth Building

Question 1

The ____________________ established minimum standards for private retirement plans

Answer 1

Employee Retirement Income Security Act
of 1974 (ERISA)

Question 2

The _________________ increases the funding obligation of employers to private retirement plans.

Answer 2

Pension Protection Act of 2006

Question 3

Under the ratio-percentage test, the percentage of non-highly compensated employees covered under the plan must be at least ________ of the percentage of highly compensated employees who are covered

Answer 3

70%

Question 4

Funds withdrawn from a qualified plan before age 59½ are subject to a ______________

Answer 4

10% early distribution penalty

Question 5

Distributions must start no later than _________ of the calendar year following the year in which the individual attains age ______

Answer 5

april 1st, 72

Question 6

A top-heavy plan is a retirement plan in which more than _________ of the plan assets are in accounts attributed to key employees

Answer 6

60%

Question 7

In a defined-benefit plan, the retirement benefit is known but …..

Answer 7

• The contributions will vary depending on the amount needed to fund the desired benefit
  – The amount can be based on career-average earnings or on a final average pay, which generally is an average of the last 3-5 years earnings
• Defined Benefit Plans are Pension Plans

Question 8

In a defined-contribution plan, the
contribution rate is fixed but ….

Answer 8

• The actual retirement benefit is variable
  – 401(k) plans are defined-contribution plans
  Most newly installed qualified retirement plans are defined-contribution plans
  – Cost to employer is lower because they do not grant past-service credits

Question 9

What is the disadvantage for an employee of a defined-contribution plan?

Answer 9

– Employees can only estimate their retirement benefits
– Investment losses are borne by the employee
– Some employees do not understand the factors to consider in choosing investments

Question 10

What is a profit-sharing plan?

Answer 10

• A profit-sharing plan is a defined-contribution plan in which the employer’s contributions are typically based on the firm’s profits
  – There is no requirement that the employer must actually earn a profit to contribute to the plan
  – Funds are distributed to the employees at retirement, death, disability, or termination of employment (only the vested portion), or after a fixed number of years
  – There is a 10% tax penalty for early withdrawal

Question 11

How to calculate ideal nest egg size?

Answer 11

Nest Egg / 8% = Nest egg needed

Question 12

Who contributes to a 401(k)?

Answer 12

Both the employer and the employees contribute, and the employer matches part or all of the employee’s contributions

Question 13

Contributions to a 401(k) plan accumulate
_________, and funds are taxed as _________ when withdrawals are made

Answer 13

tax free, ordinary income

Question 14

For 2022, the maximum limit on elective
deferrals for a 401(k) and 403(b) plans is …..

Answer 14

$20,500 for workers under age 50

Question 15

For those age 50 and over, a “catch-up
provision” of ____________ is allowed for a total of ________

Answer 15

$6,500, $27,000

Question 16

What are some permitting purchases to take money out of a 401(k) early without penalty?

Answer 16

– To pay certain non reimbursable medical expense
– To purchase a primary residence
– To pay post-secondary education expenses
– To make payments to prevent eviction or foreclosure on your home

Question 17

What is a 403(b) plan?

Answer 17

A 403(b) plan is a retirement plan designed for For those working in education, hospitals, or a nonprofit organization

Question 18

How can 403(b) plans be funded?

Answer 18

– The plan can be funded by purchasing an annuity or by investing in mutual funds
– The employer must purchase the annuity and it is nontransferable

Question 19

What is a Simplified Employee Pension (SEP) Plan?

Answer 19

An IRA plan that allows employers to contribute to traditional IRAs

Question 20

How much can an employer contribute to an SEP plan? How much can an employee contribute?

Answer 20

Employers: The lesser of 25% of contribution or $61,000
Employees: None

Question 21

What type of vesting does an SEP have?

Answer 21

Full and immediate

Question 22

What is a Simple IRA?

Answer 22

A SIMPLE IRA is a retirement plan designed for small businesses with 100 or fewer
employees. It’s a cheaper (and easier) plan for an employer to set up when compared to a traditional 401(k).

Question 23

What is the contribution limit for Simple IRAs for 2022?

Answer 23

For 2022, eligible employees can elect to contribute up to 100% of compensation
up to a maximum of $14,000 Employers must make some form of a contribution to employees’ accounts.

Question 24

What are the common 401(k) mistakes?

Answer 24

– Inadequate 401(k) account balances
– Incomplete coverage of the labor force
– Lower benefits for women
– Limited protection against inflation
– Workers spending lump-sum pension distributions
– Investment mistakes by participants that jeopardize economic security

Question 25

What is a Roth 401(k) plan?

Answer 25

In a Roth 401(k) plan, you make contributions with after-tax dollars, and qualified distributions at retirement are received income-tax free

Question 26

Employers that match Roth 401(k) contributions match $$ goes into a _______

Answer 26

Traditional 401(k)

Question 27

What is Guaranteed Investment Contract?

Answer 27

A guaranteed investment contract (GIC) is an arrangement in which the insurer guarantees the interest rate for a number of years on a lump sum deposit

Question 28

What can a 529 plan be used to pay for?

Answer 28

The money you save in a 529 plan can be used to pay for qualified education expenses including:
- Tuition and fees at an eligible higher education institution
- Cost of room and board while enrolled at an eligible higher education institution, at least part-time
- Books, supplies and equipment (including computers) required for enrollment in or attendance at an eligible higher education institution
- Expenses for special needs services necessary for a beneficiary to enroll in or attend an eligible post-secondary school if the expenses are incurred in connection with enrollment or attendance at the institution
- Expenses up to an aggregate of $10,000 a year per beneficiary, tax-free, to cover K-12 tuition at public, private or religious elementary or secondary schools
- Expenses for fees, books, supplies and equipment required for a designated beneficiary’s participation in an apprenticeship program registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act
- Amounts paid as principal or interest on any qualified education loan of a 529 plan designated beneficiary or a sibling (brother, sister, stepbrother or stepsister) of the beneficiary, subject to a lifetime limit of $10,000

Question 29

How do I know which colleges are eligible to use a 529 plan for?

Answer 29

Any eligible educational institution in the United States, including
- Out-of-state and some international schools:
- Two- and four-year public and private colleges
- Graduate and professional programs
- Certain vocational-technical schools

Question 30

How does a 529 plan affect financial aid?

Answer 30

• A 529 plan is treated as the account owner’s asset, not the student’s, in determining eligibility for federal financial aid.
• Only 5.64% or less of the account’s value is included when determining your expected family contribution each academic year.

Question 31

Are there any tax implications for withdrawals from a 529 account?

Answer 31

• No, as long as the withdrawal is used to pay for qualified expenses.
• Only earnings on withdrawals will be subject to income tax in the event of using it for a non-qualified use

Question 32

Can I change my investment selection of a 529 plan?

Answer 32

• You can reallocate current investment selections twice per calendar year
• You can change the allocation of future contributions at any time.

Question 33

What does Suze Orman say in her “401(k) Contribution Update”?

Answer 33

• Save 10% in your 20s
• Save 15% in your 30s
• If older, get to 15% savings and quickly increase up to 20% until reaching max

Question 34

How does Suze Orman suggest to save more in her “401(k) Contribution Update”?

Answer 34

• Use a roth 401k
• Boost your contribution rate this year by 1% point
• Boost your savings rate by 1% every year
• Use half of every raise for retirement
• Use a bonus to fund a Roth IRA
• Drive your car longer
• Buy a smaller house
• Sell the too-big house

Question 35

What does the WSJ article “Saving for Your Retirement or Kids College?” suggest?

Answer 35

• Average price for four years of private college now at a terrifying $158,000
• Prioritize retirement but start saving for college once first child is born. If you do, you should expect to have $120,000 when its time for college just by saving $300 per month. Waiting until age 10 will result in only $50,000 saved.
• Use a 529 college savings plan to reduce taxes.

Question 36

What does the WSJ article “How to Get Your 401(k) Ready for Retirement” suggest?

Answer 36

1: If you haven’t done it lately, review your 401(k) investment mix.
2. Beware of the rate sensitivity of fixed-income funds you own in your 401(k).
3. Look for greater variety within your 401(k).
4. Use IRAs and other accounts to complement your 401(k).
5. Check whether your 401(k) plan includes a brokerage window, or self-directed account.
6. Consider getting professional advice.

Question 37

What does the WSJ article “The 4% Nest Egg Rule is Cracking” state?

Answer 37

• Traditionally, don’t spend more than 4% of savings in the first year of retirement and adjust for inflation.
• Now it’s suggested to not spend more than 3.3%, new simulations say people will run out of money if continue to spend 4%.
• Counterintuitive but its worst time to retire when stock market is high because miss out on growth.
• Could also increase withdrawals after retirement when returns in the stock market are high and adjust how you withdrawal to take out more during good years in the market.