Personal Financial Management - Chapter 3 Flashcards Preview

Senior Year > Personal Financial Management - Chapter 3 > Flashcards

Flashcards in Personal Financial Management - Chapter 3 Deck (37)


Typical retirement plan found in most corporations



Typical retirement plan found in non-profit organizations such as schools and hospitals


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Growth isn't taxed until money is withdrawn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



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



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)

- 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)

1. Invest $1,000 in an emergency fund
2. Pay off debt
3. 3-6 months of expenses in an emergency fund
4. Invest 15% of household income in Roth IRAs and pre-tax retirement plans
5. College funding


What does tax-favored mean? (2)


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)


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)

1. Fund 401(k) or other employer plan up to the match

2. Above the match, fund both IRAs; if there aren't any matches, start with Roth IRAs

3. 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)

1. Save for college by using ESA "educational IRA"

2. Use 529 Plan if you want to save more or if you don't meet the income limits for an ESA

3. 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


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)

1. Never save using insurance
2. Never save using saving bonds (only earns 5-6%)
3. 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