Wall Street Journal: Assignment #3
This is an INDIVIDUAL assignment. Submit your answers in hardcopy at the beginning of class. Check the syllabus for the due date. Handwritten answers are NOT acceptable. Use Word to write your answers.
Chapter 5: Planning
1. There are two basic types of retirement plans available: 1) defined benefit plans, and 2) defined contribution plans. Briefly describe the two types of plans; include at least three features of each. (Not defined in book, look elsewhere)
a. Defined benefit plans:
Employee benefits are sorted out based on a formula. This formula uses some factors to calculate. For example salary history and duration of ...view middle of the document...
3. People tend to change jobs more frequently today that they did in the past. Suppose you worked for five years at your first firm, then change jobs to move to a better position with another firm.
e. Why would it be a bad idea to take your 401(k) account balance in cash and go on vacation between jobs?
The worst option is taking the distribution and keeping the money. The taxes and penalties will consume at least 30% of the account balance and rob you of substantially more income at retirement since this money is not in the market working for you.
4. For individuals who do not have access to an employer-provided retirement plan, Individual Retirement Accounts are available. Suppose you open a tax-deductible IRA.
f. How much can you deposit each year in the IRA account?
Younger than 50: $5,000/year
Over 50: $1,000 extra / year
g. How are the contributions treated for tax purposes?
You can contribute as much as you want up to the maximum amount for which you qualify , however, you can deduct from your taxes only what you contribute.
The deductibility of your contributions to an IRA depends on your tax-filing status, your income, and whether you; your spouse, or both of you participate in a company-sponsored retirement savings plan.
h. When you make withdrawals in retirement, how are the contributions and returns on those contributions taxed?
IRAs are taxed > at retirement or if withdraw early > at ordinary income rates.
5. A second type of IRA is the “Roth IRA.” Suppose you open a Roth IRA account.
i. How much can you deposit each year into the account?
If you're younger than age 50, you can save $5,000 to your Roth IRA in 2012. If you're over 50, you can get extra $1,000, so total up to $6,000.
If your tax is single and you earn more than $110,000 but less than $125,000, the amount you can contribute will be limited. If you earn more than $125,000, you can't contribute to a Roth IRA.
If you get marry with somebody and filing jointly, your contributions are limited if your...