Financial Literacy Flashcard

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What is a Traditional IRA?

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A Traditional IRA (Individual Retirement Account) is a type of retirement savings account that allows individuals to make contributions with pre-tax income, meaning taxes are paid upon withdrawal during retirement.

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What is a 401(k) plan?

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A 401(k) plan is an employer-sponsored retirement savings plan that allows employees to save a portion of their paycheck before taxes are taken out, with taxes due upon withdrawal.

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What is the difference between pre-tax and post-tax contributions?

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Pre-tax contributions are made before income taxes are deducted, reducing taxable income in the year of contribution. Post-tax contributions are made after taxes, meaning no tax deduction is received.

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What is compound interest?

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Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.

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How does diversification reduce investment risk?

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Diversification reduces investment risk by spreading investments across various financial instruments, industries, and other categories to minimize the impact of any single asset's poor performance.

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What is an indexed fund?

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An indexed fund is a type of mutual fund or exchange-traded fund (ETF) that aims to replicate the performance of a specific index, such as the S&P 500, by holding the same stocks in the same proportions.

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What is the formula for calculating future value with compound interest?

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The future value (FV) can be calculated using the formula: FV = P(1 + r)^n, where P is the principal amount, r is the annual interest rate, and n is the number of years.

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What is the impact of tax rates on retirement withdrawals?

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The tax rate during retirement affects how much of the withdrawn amount is kept after taxes. A lower tax rate in retirement can result in more money retained compared to a higher tax rate.

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What is the rule of 72?

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The rule of 72 is a formula used to estimate the number of years required to double the investment at a fixed annual rate of return by dividing 72 by the annual interest rate.

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What is the significance of a stock investment club?

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A stock investment club is a group of individuals who pool their money to invest in stocks, allowing members to learn about investing, share knowledge, and reduce individual risk.