PErsonal Finance Chapter 10

What is the difference between defined benefit plans and defined contribution plans?

• Defined contribution plans require employees to save less for retirement, whereas defined benefit plans require employees to save more.

• Defined benefit plans guarantee payments to retirees, whereas defined contribution plans make contributions to retiree accounts without making guarantees.

• Defined contribution plans are pensions and defined benefit plans are not.

• Defined benefit plans and defined contribution plans are both pension plans.

You should start to calculate your retirement need when:

• It’s always important, regardless of age.

• you will retire in a few years.

• older than 55

• when u just retired

Longevity risk is the risk that you will:

• run out of money just after retirement.

• outlive your savings.

• live beyond 90 years of age.

• live too long.

Which of the following is true regarding 401(k) plans?

I.401(k) plans are primarily funded by employees.

II.401(k) plans are primarily funded by employers.

III.Investments grow tax-deferred in 401(k) plans.

IV.Employers may provide matching contributions to 401(k) plans.

• I, III, and IV

• I, II and IV

• I, II and III

• I and II only

In what ways are 401(k) plans, 403(b) plans, and 457 plans similar?

• They are identical except for the type of employer who may sponsor them.

• They are all considered pension plans.

• They each provide employees tax-advantaged opportunities to save for retirement.

• They are each primarily funded by employer contributions.

Roger is currently age 68. He is creating a retirement income plan. As such, he needs to estimate his future required distributions from his retirement plans. Help Roger by telling him when he must begin taking distributions from his Roth IRA.

• He never needs to take a distribution

• He can wait until he begins taking Social Security benefits,which is currently age 70.

• e should already be taking distributions because he is older than age 59½.

• He must begin minimum distributions when he turns age 70½.

Somerset, age 43, is self-employed and started saving for retirement 8 years ago using a Roth IRA. He liked the idea of someday taking distributions on a tax-free basis. Unfortunately, he has recently run into some business troubles and needs to raise cash quickly. He would like to take a distribution from his Roth IRA immediately. Which of the following statements is true for Somerset?

• As long as he only takes out his contributions—not the account earnings—the distribution will be tax- and penalty-free.

• The distribution is not allowed, unless he is purchasing a new home or paying for a child’s education, before age 59½.

• Any distribution will be deemed a return of earnings and principal; this means that his contributions will be subject to tax, while the earnings will be subject to a 10% penalty.

• Because he is younger than age 59½, any distribution will be subject to a 10% early withdrawal penalty.

Nancy, age 55, is self-employed and has never made a lot of money. But, she has consistently saved $4608 per year into a traditional IRA. Over the years, she has taken full advantage of the tax law and deducted each year’s contribution from her tax return. If Nancy started saving at age 25 and has earned an average annual return of 5%, how much is the account worth today?

• $616189

• $306150

• $23555

• $48434

Xavier recently graduated from college with a degree in mechanical engineering. He currently makes $87,000 per year. He has aspirations to move up with his firm and eventually earn much more. If his plan works out, he will be paying more taxes sometime in the future. Which of the following retirement plan options should Xavier choose today?

• Roth IRA

• Treasury Direct IRA

• Rollover IRA

• Traditional IRA

Deciding how to invest retirement savings can be a time-consuming task. However, there are investments that simplify this task. These investments are called:

• exchange-traded funds

• target date funds

• bonds

• index funds