Chapter 12 | Retirement

Question 1

Social Security

Answer 1

Federal program that taxes you during your working years (7.65% from you + employer).
Uses funds to make payments to you upon retirement.
Only supposed to supplement retirement income

Question 2

How to qualify for social security

Answer 2

Credits are earned by working and paying your social security (aka FICA) taxes for a certain period of time. Earn 4 credits/yr and need 40 to qualify

Question 3

Purpose and Problems of the system

Answer 3

Purpose: supplement to help support people during retirement
Roosevelt signed the bill in 1935. Pay as you go - younger folks support the older people.
Problem: people live longer now and more are drawing from the fund for longer periods of time. Hence, the fund is draining

Question 4

Remedies

Answer 4

Increase tax by 2%
Pay on income of $200k instead of 100k
Increase retirement age

Question 5

Defined Benefit Plan

Answer 5

Companies instituted plans intended to take care of their retired workforce right to their deaths, based on a preset formula that factored in the employee’s years of employment, pre-retirement wages, and/or age.
Funded entirely by the employer.
Employee bore zero risk.
Over time, employers realized the burden was too heavy

Question 6

Defined Contribution Plan

Answer 6

A retirement plan in which the contribution is defined, but the employee chooses what to do with the money.
The investment risk rests solely on the employee who has the ability to choose from a number of investment options

Question 7

401(k)

Answer 7

Employer allows employees to deposit a part of their compensation in this plan where it grows unfettered and untaxed until withdrawn at a certain age.
Often, employers match the employees’ contributions

Question 8

How 401(k)’s work

Answer 8

Employer matches dollar-for-dollar to a pre-determined amount, or a set amount regularly.

Question 9

Acceptable withdrawals and penalties 401(k)

Answer 9

Withdrawals before age 59 1/2 are penalized 10% unless the employee retires, dies, becomes disabled, changes jobs, or suffers a financial hardship as defined by IRS regulations.

Question 10

IRA

Answer 10

Individual Retirement Agreement. A personal retirement savings plan available to most people receiving taxable compensation during the year.

Question 11

William Roth

Answer 11

The architect of the retirement savings opportunity act of 1999.

1. Significantly raised contribution limits
2. Permitted individuals age 50 and older to make additional catch-up contributions to IRAs and 401(k) plans
3. Eliminated the 25% of compensation limitation on contributions
4. Removed the income limits that currently apply to IRA programs

Question 12

Traditional IRA

Answer 12

No minimum or required IRA contribution. All earnings within an IRA account are untaxed until withdrawn.
Money may be withdrawn from an IRA at any time but may be taxed at ordinary income tax rates.
Withdrawals from an IRA other than a Roth or Education IRA prior to age 59 1/2 will result in a 10% excise tax in addition to ordinary income tax.

Question 13

Roth IRA

Answer 13

Contributions to the account are not tax deductible.
“Qualified” distributions (withdrawals) from the account are not taxable. Qualified if:
Made after the taxpayer attains age 59 1/2
Made by a beneficiary after the taxpayer’s death
Made because the taxpayer is disabled
Made by a first-time home-buyer to acquire a principal residence

Question 14

Switching from traditional to roth

Answer 14

Switching involves cost, taxes, and penalties on pre-tax money. If you have had a trad. IRA for >20 yrs, better to stick with it.

Question 15

SEP

Answer 15

Simplified Employee Pension.
A type of retirement plan that is popular among sole proprietors and owners of small businesses.
Purpose - to ensure that people working for very small businesses do not fall through the retirement cracks. An employer may contribute up to 25% of an employee’s compensation annually to each employee’s IRA

Question 16

SIMPLE

Answer 16

A Savings Incentive Match Plan for Employees.
Set up by a small employer for a firm’s employees.
Employees may contribute up to $11,500/yr to these IRAs and will receive some level of a matching percentage of pay from their employer.
The employer can choose either a s% non-elective compensation or a dollar-for-dollar match of up to 3% of pay.

Question 17

Keogh

Answer 17

A defined contribution plan if you have your own business

Question 18

403(b)

Answer 18

for non profits

Question 19

ESOP

Answer 19

Employer Stock Ownership Plan.
Problem: if the company tanks, so do your nest eggs.
Potential solution: limit the amount of your own company’s stock in your retirement account. But don’t let a co with real products and real profits unfairly handicap you from maximizing your retirement portfolios.

Question 20

Vesting

Answer 20

The process of gaining ownership. You are only entitled to all your money in your current 401(k) account if you are fully vested. Most companies allow you to be fully vested within 5 years.

Question 21

Graded vesting

Answer 21

your ownership of your employer’s contribution increases proportionally with each year you stay in the company. 20% after one year, 40% after 2, etc. The longest is 6 years

Question 22

Cliff vesting

Answer 22

your ownership of your employer’s contributions goes from 0 to 100% after the specified period of time. The longest schedule allowed by law is 3 yrs