Personal Financial Management - Chapter 3 Flashcards
403(b)
Typical retirement plan found in non-profit organizations such as schools and hospitals
401(k)
Typical retirement plan found in most corporations
457 plan (2)
Deferred compensation - meaning you are deferring or putting off compensation
Usually available to government employees
529 plan
If you want to save more or if you don’t meet the income limits for an ESA, use a certain type of 529 Plan
Custodian (2)
Parent or grandparent - that person is the manager until the child reaches the age of 21
At 21 (age 18 for UGMA), they can do whatever
Direct transfer
Moving your money into an IRA account when leaving a company
ESA (2)
Educational savings account - after-tax college fund that grows tax-free for educational uses
Eligibility is based on parents’ annual income
IRA (5)
Individual retirement arrangement - tax-deferred arrangement for individuals with an earned income and their non-income producing spouses
Growth isn’t taxed until money is withdrawn
Contributions to an IRA are often tax-deductible
Good long term-investment
Everyone with an earned income is eligible
Pre-paid tuition
Paying for college ahead of time by accumulating units of tuition
Rollover (2)
Movement of funds from a tax-deferred retirement plan from one qualified-plan or custodian to another
Incurs no immediate tax liabilities or penalties, but required IRS reporting
Roth IRA
Retirement account funded with after-tax dollars that subsequently grows tax-free
SEPP (3)
Simplified employee pension plan - pension plan in which both the employee and the employer contribute to an individual retirement account
Also available to the self-employed
An SEPP-employed person may deduct up to 15% of their net profit in the business day by investing in an SEPP
Tax-favored dollars
Money that is working for you, either tax-deferred or tax-free, within a retirement plan
UGMA
Uniform gifts to minors act - legislation that provides a tax-effective manner of transferring property to minors without the complications of trusts or guardianship restrictions
UTMA
Uniform transfers to minors act - law similar to the UGMA that extends the definition of gifts to include real estate, paintings, royalties, and patents
What does pre-tax mean?
The government is letting you invest before taxes have been taken out
Why should you NEVER borrow money from your retirement plan?
Because it will lose the growth rate if you do
An IRA is not an investment, but…?
The tax treatment on virtually any type of investment
What is a list of retirement plans? Which plan is NOT a retirement plan? (2)
401(k), 403(b), 457 Plan, IRA, SEPP
the 529 Plan is NOT a retirement plan
Benefits of Roth IRAs? What is NOT a benefit? (3 benefits and one non-benefit)
Benefits:
- grows tax-free
- provides penalty-free withdrawals under certain circumstances
- more choices are available
NOT a benefit: unlimited contributions
If your company provides a 100% match up to 6% how much should you personally contribute to your 401(k) if you earn $35,000 (not including the money the company contributed)?
$2,100 –> $35,000 x .06 = $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)?
$4,600 –> $2,300 (from you) + $2,300 (from company) = $4,600 total
What is baby step 5?
College funding
If carol and joe are debt-free, how much should they be investing in retirement plans if their combined income is $145,000? (2)
$21,750 –> $145,000 x .15 = $21,750
Invest 15% of your household income into Roth IRAs and pre-tax retirement plans
Why worry about retirement when every worker pays into social security?
Social security isn’t guaranteed to everyone
Explain how the rule of 72 works (4)
It’s a quick way to do compound interest problems in your head
It will show how long it will take to double your money at a given interest rate
Divide 72/interest rate (%) = years it takes to double your $ at __% rate
Can find interest rate needed to earn if you want your money to double in a specific amount of time - 72/years you want to double your money in = interest rate needed
What are baby steps 1-5? (5)
- Invest $1,000 in an emergency fund
- Pay off debt
- 3-6 months of expenses in an emergency fund
- Invest 15% of household income in Roth IRAs and pre-tax retirement plans
- College funding
What does tax-favored mean? (2)
Examples?
That the investment is in a qualified plan or has a special tax treatment
Ex. IRAs, SEPP, 401(k), 403(b), and the 457 Plan
The maximum annual contribution for more income earners is _____ as of 2008? Will it keep growing? (2)
$5,000
Yes, it will always keep growing
Do NOT use… to fund your plan? (2)
A guaranteed investment contract (GIC) or bond funds
Should always be funding your plan whether your company matches or not
Steps to completing baby step 4 (3)
- Fund 401(k) or other employer plan up to the match
- Above the match, fund both IRAs; if there aren’t any matches, start with Roth IRAs
- Complete 15% of income by going back to your 401(k) or other company plans
What kind of plan do you use for college funding?
Tax-favored plans
Steps to funding college (4)
- Save for college by using ESA “educational IRA”
- Use 529 Plan if you want to save more or if you don’t meet the income limits for an ESA
- Move to an UTMA or UGMA plan
- it’s a good way to save with reduced taxes, but it’s not the best
Never buy a plan that (2)
Freezes your options
Automatically changes your investments based on the age of the child
More info on UTMA/UGMA Plans
3
The account is listed in the child’s name and a custodian is named
The custodian is the manager until the child reaches the age of 21
At age 21 (age 18 for UGMA), they can do whatever they please
3 “Nevers” of college savings (3)
- Never save using insurance
- Never save using saving bonds (only earns 5-6%)
- Never save using pre-paid tuition
If you need college funds within 5 years.. use… do NOT use… (2)
USE the money market fund
Do NOT use the ESA
