Chapter 3 Wealth Building and College Savings – Flashcards
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A retirement plan for self-employed people
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SEPP
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A deferred compensation plan - you are deferring or putting off compensation. This is usually available to government employees.
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457
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Typical retirement plan found in most companies
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401(K)
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Retirement plan found in non-profit groups such as schools and hospitals
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403(b)
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Save for college by first using this type of account - a good way to save for college
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Educational Savings Account (ESA)
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Law similar to the Uniform Gifts to Minors Act (UGMA) that extends the definition of gifts to include real estate, paintings, royalties, and patents. Used after you max out ESA
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UTMA
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Movement of tax-deferred retirement money from one plan to another
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Rollover
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Invest 15% of income for retirement
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Baby Step 4
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Manager of child's UTMA account until he or she reaches age 21
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Custodian
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College Funding in a tax-favored plan
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Baby Step 5
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Money the government allows you to invest before taxes are taken out
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Pre-tax
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The tax treatment on virtually any type of investment - a tax deferred arrangement for people with earned income and their non-income-producing spouses; growth is not taxed until money is withdrawn - think of a coat that keeps the investment protected from taxes
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Individual Retirement Arrangement (IRA)
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the race analogy used to describe wealth building. Wealth building takes time. Think slow & steady wins the race!
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marathon
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Money that is working for you, either tax-deferred or tax-free, within a retirement plan
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Tax-Favored Dollars
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The maximum annual contribution in an IRA as of 2008
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$5,000
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A retirement account funded with after-tax dollars that subsequently grows tax free-you have already paid the taxes before you contribute the money to the account
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Roth IRA
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By dividing the interest rate into 72, it will tell you approximately how many years it will take to DOUBLE your money. The same can be done by dividing 72 by the number of years you plan to invest to get the interest rate you need to double your money.
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Rule of 72
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The Roth IRA uses after tax dollars (tax free dollars) and the investment grows; the traditional IRA uses pre-tax dollars (taxes not yet taken) so you pay taxes on the growth of the investment
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Roth IRA vs. Traditional IRA
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Over 59 and a half; First time home purchase up to $10,000; death or disability
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Roth IRA withdrawal rules
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Someone with the heart of a teacher that will patiently explain everything to you
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A good financial counselor
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Money set aside for unexpected expenses that keeps you from borrowing money from investments(on which you will have to pay penalties or taxes thereby messing up your compound interest) or charging it to credit cards (on which you pay high interest). An emergency fund prepares you for the unexpected.
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Emergency Fund
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1. Never save for college using insurance 2. Never save for college using savings bonds 3. Never save for college using pre-paid college tuition
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The 3 "nevers" of college savings
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Social Security does not provide a large sum of money each month, nor will it likely to still be around by the time you are going to need it. Depending on this as your sole retirement plan is a very bad idea.
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Why is it called "Social Insecurity"?
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Invest 15% of your income for retirement as follows: 1. first contribute up to the 401(k) match amount 2. then go fund the Roth IRA 3. if you still haven't reached 15% of your income, then go back and invest the remainder in your 401(k)
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3-Step Retirement Investment
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This means the company you work for will add to your 401(k) based on the amount you have put in....usually up to a certain percentage. Before investing, you have made a 100% return on your money! Take advantage of this and put in the MAXIMUM percentage!
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401(k) Company Match
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Educational Savings Account - An after tax college fund that grows tax-free for educational uses; eligibility based on parents' annual income
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ESA
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Example: at 12% interest how long will it take to double your money? 72/12=6 years. Ok...What interest rate do I need to earn if I want my money to double in 7 years? Divide 72 by the years instead of percentage...72/7=10.28%
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Example Rule of 72
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Singles - 100% contribution with income less than $95,000. Not eligible above $110,000 Married filed jointly - 100% contribution with income less than $150,000. Not eligible above $160,000
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Roth IRA Eligibility
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What you should do with your retirement accounts when you leave a company. Also known as a ROLLOVER. If you take the money in hand, you will be subject to penalties and taxes. NEVER DO THIS, always ROLLOVER!
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Direct Transfer
