Ch 11: Retirement and Savings Plans
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Term: 401K
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Defined contribution plan offered by a corporation to its employees, which allows employees to set aside tax-deferred income for retirement purposes In some cases, employers will match their contribution
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Term: Direct Transfer
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Movement of tax-deferred retirement plan money from one qualified plan or custodian to another Results in no immediate tax liabilities or penalties, but requires IRS reporting
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Term: Individual Retirement Arrangement (IRA)
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Tax deferment arrangement for individuals with earned income and their non-income-producting spouses Growth is not taxed until the money is withdrawn Contributions to an IRA are often tax-deductible
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Term: Rollover
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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 requires IRS reporting
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Term: Roth IRA
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Retirement account funded with after-tax dollars that subsequently grows tax free
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Term: Tax-favored dollars
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Money that is working for you, either tax deferred or tax free, within a retirement plan
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Traditional IRA
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A tax-deferred arrangement in which growth is not taxed until money is withdrawn Contributions to an IRA are often tax-deductible
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Roth IRA
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An IRA funded with after-tax dollars and grows tax free
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SEPP
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A pension plan in which both the employee and the employer contribute
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401K
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A plan offered by a corporation to is employees and allows individuals to set aside tax-deferred income In some cases employers match their contributuion
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Roth 401K
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A 401K plan that has after tax contribution benefits
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403(b)
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A plan similar to the 401K plan and offered by non-profit organizations
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457
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A plan established by state and local governments for tax-exempt government agencies Employees are allowed to make salary deferral contributions
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Pre-tax Contributions
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Taken from your gross income before taxes Taxes due upon withdrawal
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After-tax Contributions
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Taken from your net income after taxes No taxes due upon withdrawal
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How do you maximize your retirement savings using company matches in combination with other retirement plans
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1. First, fund your 401K if your company matches the contribution 2. Second, fund Roth IRA ($5000) 3. Third, invest the rest (until you reach 15% of your income) into the 401K or other company plans
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T/F Retirement means savings enough money to quit the job I hate
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F. It is security
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40% of Americans making less than $35,000 per year said the best way for them to have $500,000 at retirement age is to
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win the lotto
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What is the 15 percent rule
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Invest 15 percent of before tax gross income annually toward retirement
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T/F Consider what your company matches in calculating the 15% you put away for retirement
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F
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Once the emergency fund is in place, you should begin retirement and college funding, which falls within
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long-term investing for wealth building
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Baby Step #1 is
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$1,000 in an emergency fund ($500 if your household income in less than $20,000 a year)
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Baby Step #2 is
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Debt snowball
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Baby Step #3 is
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3-6 months of expenses in an emergency fund
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Baby Step #4 is
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investing 15% of your household income into Roth IRAs and pre-tax retirement plans
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Tax-favored means that the investment is in a
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qualified plan or has a special tax treatment
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T/F Qualified plans are like coats over an investment, meaning they keep taxes off the investment
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T
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What are the 5 qualified plans?
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1. IRA- Individual Retirement Arrangement 2. SEPP- Simplified Employee Pension Plan 3. 401K 4. 403b 5. 457
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Tax-Favored Dollars
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Money that is working for you, either tax deferred or tax free, within a retirement plan
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When it comes to IRAs who is eligible
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Everyone with an earned income
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For and IRA, the maximum annual contribution for income earners is currently
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$5000
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T/F An IRA is an investment
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F. An IRA is not a type of investment at a bank. It is the tax treatment on virtually any type of investment
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The Roth IRA is an _______-tax IRA that grows tax free
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The Roth IRA is an *after*-tax IRA that grows tax free
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T/F The Roth IRA has more choices
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T
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T/F The Roth IRA is best if you're in a higher bracket at retirement
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T
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IRA in Roth, IRA stands for
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Individual Retirement Arrangement
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Roth 401K Definition
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A retirement plan similar to a 401K which has after-tax contribution benefits
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Investing $5000 pre-tax is different than investing $5000 after-tax. It takes more than $5000 to get a home with $5,000 ______ taxes. It would take $6,000
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Investing $5000 pre-tax is different than investing $5000 after-tax. It takes more than $5000 to get a home with $5,000 *after* taxes. It would take $6,000
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With Roth IRA there are no taxes when you cash it out, so it forces you to
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invest more
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T/F With Roth IRA it is less flexible
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F. More flexible
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Why is the Roth IRA more flexible
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The Roth IRA offers tax-free and penalty-free withdrawals at any time equal to contributions After the emergency fund is depleted you have a fallback
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After _____ years you can make tax-free, penalty-free withdrawals of 100% with Roth IRA under certain conditions
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5 years
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After five years you can make tax-free, penalty-free withdrawals of 100% with Roth IRA under what three conditions
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1. Over 59 and a half years old 2. Because of death or disability 3. First-time home purchase (max $10,000)
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T/F Dave recommends using your Roth IRA for first-time home purchase (max $10,000)
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F
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A self-employed person may deduct up to ____% of their net profit on the business by investing in SEPP
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15%
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Simplified Employee Pension Plan (SEPP)
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Pension plan in which both the employee and the employer contribute to an individual retirement account
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Limitations of SEPP
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The maximum deductible amount is 25% of your total income, up to a $49,000 limit
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T/F Most companies have completely done away with pension plans
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T
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Pension plans have been replaced by
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Self-funded and matching type plans, like 401K
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T/F The 401K is yours, unlike the pension plan which was an asset to the company
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T
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If you do not put money into a 401K there will be
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nothing in the fund
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T/F A pension plan is funded automatically by your company
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T
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The 403b is found in what type of organizations
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non-profit such as churches, hospitals, and schools
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What is a 403b plan
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Retirement plan similar to a 401K plan One that is offered by a non-profit organization (rather than corporations) Employees invest tax-deferred dollars
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T/F A 403b plan is tax free
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F. Tax deferred
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Rule of 72
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Compound interest calculation The Rule of 72 says that by dividing the interest rate into 72, you will know approximately how long it will take to double your money Know how to calculate for exam
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How long will it take to double your money at 12%
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72/12 = 6 years
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What interest rate do I need to earn if I want my money to double in 7 years
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72/7= 10 plus (10.28%)
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T/F Rely on social security to take care of you during retirement
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F. The money you put into it has already been paid out to the retirees before you It is an unrealistic source of income
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The 457 is ______ compensation
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deferred Which means you are deferring or putting off compensation Usually available for government employees
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What is Dave's least favorite retirement plan
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457
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With 457 do not use
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Guaranteed Investment Contract (GIC) or bond funds to fund your plan
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GIC are like
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a C.D. inside of your 401K You will only make about 3-4% and it will not help you win long-term
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457 Plan
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Non-qualified, deferred compensation plan established by the state and local governments for tax-exempt government agencies and tax-exempt employers Eligible employees are allowed to make salary deferral contributions to the 457 plan Earnings grow on tax-deferred basis and contributions are not taxed until the assets are distributed from the plan
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T/F You should be funding your plan whether your company matches or not
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T
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You should always _____ over your retirement plans to an IRA when you leave the company
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You should always *roll* over your retirement plans to an IRA when you leave the company
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Don't bring money home. Instead, move it straight into an IRA by a
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Direct transfer
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What are the 3 conditions you should roll to a Roth IRA
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1. You will have over $700,000 by age 65 2. You can afford to pay the taxes separately, not from the IRA 3. You understand that all taxes will become due on the rollover amount
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Three mistakes to avoid when saving for retirement
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1. Staying in debt 2. Forgetting about taxes 3. Failing to plan
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T/F Never borrow on your retirement plan
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T
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For federal government workers who have the standard thrift plan what is recommended
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60% in the C fund 20% in the S fund 20% in the I fund
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Baby Step #4
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investing 15% of your household income into Roth IRAs and pre-tax retirement plans
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Fund the 401K or other employer plan up to the
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match
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Above the match, fund
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Roth IRAs
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If your company has no match, start with
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Roth IRA
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Complete 15% of income by going back to the
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401K or other company plans
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T/F Save long-term in tax-favored plan-a Roth IRA grows tax free
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T
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T/F Contribute to your 401K, especially if your company offers a match
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T
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Do you sign up for investment plans that you do not understand
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No
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T/F Never borrow on your retirement plan
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T
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Retirement plan for self-employed people
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SEPP
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Grows tax-free
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Roth IRA
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They typical retirement plan found in most corporations
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401K
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The typical retirement plan found in non-profit groups such as schools and hospitals
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403b
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T/F Pre-tax contributions are ones the government lets you invest money in before taxes have been taken out of your income
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T
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T/F Savings bonds are a good way to save for college
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F
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T/F Never borrow money from your retirement plan
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T
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T/F When you leave a company, don't move your money from that retirement account
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F
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T/F An IRA is a specific type of investment
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F. An IRA is the tax treatment placed on an investment
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The ______ IRA grows tax-free A. Roth B. Traditional C. Original D. Life insurance
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A. Roth
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Which of the following is not a retirement plan? A. 529 B.401K C. 403b D. 457
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A. 529-Is for college funding
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Which is not a benefit of the Roth IRA A. Grows tax-free B. Allows unlimited contributions C. Provides penalty free withdrawals under certain circumstances D. Offers more choices
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B. Allows unlimited contributions
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If your company provides a 100% match up to 6%, how much should you personally contribute to your 401K if you earn $35,000 (not including the money the company contributed)
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$35,000 x 0.06 =*$2,100*
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If you contribute $2,300 to your 401K and your company matches up to 3% how much is in the account (assume you have not gone over the 3% match)
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$2,300 x 2 =*$4,600*
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What should you do with your retirement accounts when you leave a company? A.Cash them out B. Fund deposit C. Fund shift D. Direct transfer
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D. Direct transfer
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Baby Step 5 is
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College funding
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If Micayla and Joe are debt free, how much should they be investing in retirement plans if their income is $145,000
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$145,000 x 0.15= *$21,750*
