Question 1

Which of the following is a feature of an Education IRA (or Coverdell Education Savings Account)?

Accepted Answer

All of the given options are features of an Education IRA (or Coverdell Education Savings Account). The contributions to an Education IRA are not tax-deductible, but the earnings grow tax-deferred, and withdrawals for qualified education expenses are tax-free. There is an annual contribution limit of $2,000 per beneficiary, and a 10% early withdrawal penalty waiver if the money is used for higher education expenses.

Question 2

At a 3 percent rate of inflation approximately how many years will it take for prices to double?

Accepted Answer

The answer of At a 3 percent rate of inflation...

Question 3

Ben Carmichael has been making contributions into an individual retirement account for his retirement. His contributions are tax deductible as his employer does not offer a retirement plan. What type of individual retirement account does he have?

Accepted Answer

The fact that Ben's contributions to his retirement account are tax deductible indicates that he has a Traditional IRA. This is because contributions to a Traditional IRA are tax deductible if the individual is not covered by an employer-sponsored retirement plan. The other options presented (Roth IRA, Spousal IRA, Coverdell Education Savings Account, and 401(k)) do not fit Ben's situation as described.

Question 4

Which one of the following is not a typical characteristic of a defined benefit plan?

Accepted Answer

Defined benefit plans typically do not require employee contributions. Instead, the plan is funded entirely by employer contributions, which are determined by a formula-based benefit. Investments are often managed by plan officials, and there may be a limited government-guaranteed benefit. However, employee required contributions are more commonly seen in defined contribution plans, such as 401(k)s.

Question 5

Which of the following is typically a characteristic of a defined contribution plan?

Accepted Answer

Defined contribution plans, such as 401(k) plans, do not have a federal guarantee of benefits. Instead, the retirement benefit is dependent on the amount contributed and investment performance.

Question 6

The contribution Billy Freniere's employer makes to his retirement plan depends on the profits of the company. What type of retirement plan does Billy have?

Accepted Answer

Billy has a profit-sharing plan, where the contribution made by his employer depends on the profits of the company. Money-purchase pension plans have fixed contribution rates, while stock bonus plans involve the employer contributing company stock to the employee's retirement account. Salary reduction plans are also known as 401(k) plans and 403(b) plans are typically offered to employees of non-profit organizations.

Question 7

Which one of the following is not a private source of retirement income?

Accepted Answer

Social Security is a government-funded retirement program and is not considered a private source of retirement income. Traditional IRAs, defined contribution plans, defined benefit plans, and spousal IRAs are all types of private retirement income sources.

Question 8

Which is correct with respect to life expectancy?

Accepted Answer

Women have a longer life expectancy than men globally and in most countries, including the United States. According to the World Health Organization (WHO), the global life expectancy for women is 75 years, while for men, it is 70 years. In the United States, the life expectancy for women is 81 years, while for men, it is 76 years.

Question 9

What percent of Americans ages 65 to 74 are still in the workforce?

Accepted Answer

According to the Bureau of Labor Statistics, the labor force participation rate for Americans ages 65 to 74 is 58%.

Question 10

The Social Security Administration estimates that what percent of individuals age 65 and older would live in poverty without Social Security benefits?

Accepted Answer

The Social Security Administration estimates that without Social Security benefits, 47% of individuals age 65 and older would live in poverty.

Question 11

Bruce Willis has been making contributions into an individual retirement account on behalf of his nonworking wife. What type of individual retirement account is this?

Accepted Answer

This is a spousal IRA where an individual can make contributions to an IRA account on behalf of their nonworking spouse. This allows couples to increase their retirement savings and take advantage of the tax benefits of an IRA account.

Question 12

According to the 2012 Trustees Report, in what year is it projected that the funds available for paying Social Security benefits will be exhausted at current benefit and tax rates?

Accepted Answer

According to the 2012 Trustees Report, it is projected that the funds available for paying Social Security benefits will be exhausted by the year 2033 at current benefit and tax rates. After this point, only payroll taxes will be available to pay out benefits, resulting in a reduction in benefits unless changes are made to the system.

Question 13

If a rollover from a retirement fund or other IRA is not made directly to a similar employer-provided retirement plan or an IRA, there will be a mandatory federal income tax withholding equal to what percent of the taxable distribution?

Accepted Answer

If a rollover from a retirement fund or other IRA is not made directly to a similar employer-provided retirement plan or an IRA, there will be a mandatory federal income tax withholding of 20% of the taxable distribution.

Question 14

Which of the following is typically a characteristic of a defined benefit plan?

Accepted Answer

Defined benefit plans are typically employer-funded and the contributions are set by federal rules.

Question 15

Which one of the following is not a typical characteristic of a defined contribution plan?

Accepted Answer

A defined contribution plan is a retirement plan in which contributions are made by the employee and/or the employer, which are invested in a portfolio of assets. The benefits received by the employee at retirement are determined by the performance of the investments, and not by a guaranteed formula-based benefit, which is a characteristic of a defined benefit plan. The other choices are typical characteristics of a defined contribution plan.

Question 16

Sarah Logan is a professor at a public university. Her employer makes nontaxable contributions to a plan in her name and reduces her salary by the same amount. What type of retirement plan does Sarah have?

Accepted Answer

A 403(b) plan is a type of retirement plan commonly used by public universities and nonprofit organizations. Employer contributions are made on a pre-tax basis and are not included in the employee's taxable income until withdrawal, which provides a tax advantage. The reduction in salary also helps minimize taxes in the present.

Question 17

Jeremiah Brown has been making contributions into an individual retirement account for his retirement. His contributions are not tax deductible but his earnings accumulate tax free. What type of individual retirement account does he have?

Accepted Answer

Jeremiah Brown has a Roth IRA since his contributions are not tax-deductible but his earnings accumulate tax-free.

Question 18

Social Security covers what percent of all U.S. workers?

Accepted Answer

Social Security covers approximately 97% of all U.S. workers, providing them with retirement, disability, and survivor benefits.

Question 19

Jasmine Smith owns a condo worth $240,000, a car valued at $25,000, and miscellaneous assets worth $7,500. She owes $185,000 on the condo and $15,000 on the car and has no other debts. Her retirement account, in which she is fully vested, contains $27,500 in mutual funds. She is insured with a $500,000 term life insurance policy. What is her net worth?

Accepted Answer

Jasmine's net worth is calculated by subtracting her liabilities from her assets. Her total assets are $240,000 (condo) + $25,000 (car) + $7,500 (miscellaneous) + $27,500 (retirement) = $300,000. Her total liabilities are $185,000 (condo loan) + $15,000 (car loan) = $200,000. Therefore, her net worth is $300,000 - $200,000 = $100,000. The life insurance policy is not included in net worth calculations.

Question 20

Sam Waterston has been making contributions into an individual retirement account to help pay for his children to go to college. Which type of account is he most likely using?

Accepted Answer

Sam Waterston is most likely using a Coverdell Education Savings Account, as it is specifically designed for education savings and offers tax-free withdrawals for qualified educational expenses. Traditional and Roth IRAs are primarily used for retirement savings, and a SEP-IRA is typically used by self-employed individuals or small business owners. A rollover IRA is used to transfer funds from a previous employer's retirement plan.

Quiz 18: Starting Early: Retirement Planning

Which of the following is a feature of an Education IRA (or Coverdell Education Savings Account) ?