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Chapter 3 PF
Personal Finance Chapter Three
| Question | Answer |
|---|---|
| Pre-tax means the government allows you to invest money after taxes are taken out. | False |
| ESAs are a good way to save for college. | True |
| Once you have a fully funded emergency fund, put 10% of your income into retirement plans. | False |
| 7 plans are designed for employees of non-profit organizations such as hospitals and schools. | False |
| If we used a race analogy to describe building wealth, it would be most like a marathon. | True |
| A retirement plan for self-employed people. | E: SEPP |
| A deferred compensation plan. | H: 457 |
| Typical retirement plan found in most companies. | F: 401(k) |
| Retirement plan found in non-profit groups (schools, hospitals). | G: 403(b) |
| Save for college by first using this type of account | I: Educational Savings Account |
| Used after you max out the ESA. | C: UTMA |
| Movement of tax-deferred retirement money from one plan to another. | J: Rollover |
| Invest 15% of income for retirement. | A: Baby Step 4 |
| Manager of a child’s UTMA account until he or she reaches age 21. | D: Custodian |
| College Funding | B: Baby Step 5 |
| The company Jason works for matches his 401(k) contribution up to 5%. Jason takes advantage of this by maximizing his contribution amount to $200 per month. At the end of one year, how much money will be in his account? | C: $4,800 |
| What definition best explains an IRA? | C: The tax treatment on virtually any type of investment |
| The primary difference between the Roth IRA and a traditional IRA is ________. | B: The Roth IRA grows tax free; the traditional IRA doesn’t. |
| Under which condition are you not able to make a tax-free withdrawal from your Roth IRA? | C: Career change and temporary drop of income. |
| What is the best option for your retirement plan when you leave a company? | B: Do a direct transfer into an IRA. |
| If you have $3,000 invested in a Roth IRA, what is true about your contribution? | A: You have already paid taxes on the money, so it will grow tax free. |
| Which of the following is a good way to save for college? | A: ESA |
| Using the Rule of 72, how long will it take your money to double at 12% interest? | A: 6 years. |
| When seeking a financial counselor to help you with your investments, always go with _______. | C: A financial counselor with the heart of a teacher who explains everything to you. |
| What does Baby Step 5 say about saving for your children’s college? | A: Use tax-favored plans. |
| Explain how an IRA works. | An IRA is the tax treatment on virtually any type of investment. It protects or shelters your money from taxes. Remember the analogy of the coat that keeps the investment warm. |
| Why should you wait until after your emergency fund is in place before you invest in retirement funds? | Because your emergency fund is there for unexpected events and charges. If you don't have an emergency fund in place before you invest in a retirement fund, then you borrow off of that and you would have to pay penalties and taxes on top of that. |
| What are three “nevers” of college saving? | Never use insurance, savings bonds, or a pre-paid college tuition. |
| What are two reasons not to rely on Social Security? | It does not provide a large sum of money ech month and there is a lot of speculation about whether or not Social Security will even exist in the near future. |
| Mike has been maxing out his 401(k) for a few years, but his company provides no matching funds. Should he stop funding the 401(k) and max out a Roth IRA, or keep contributing the max to his 401(k)? | He should start saving in a Roth IRA because it grows tax free and is a better option than the 401(k), which grows tax-deferred. |
Created by:
KadyKat