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IFYF Unit 7 Review Questions

Last Updated: July 22, 2008

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Unit 7

Tax-Deferred Investments Review Questions

  1. What is the difference between tax-exempt and tax-deferred investments?
  2. What are the advantages of investing in retirement accounts?
  3. Under what conditions can tax-deferred investments be withdrawn without the typical penalty of 10% of the amount withdrawn?
  4. Name the three categories of tax-deferred retirement plans. How do they differ?
  5. Briefly describe 401(k), 403(b), and Section 457 plans. How might the employer match vary for each plan? How are maximum contribution limits for each changing?
  6. What do Keogh, Simplified Employee Pension (SEP), SEP- IRA, and Savings Incentive Match Plan for Employees (SIMPLE) plans have in common?
  7. What factors might you consider when choosing between a defined-contribution Keogh plan and a defined-benefit Keogh plan?
  8. What are the advantages and disadvantages of a SEP or SEP-IRA?
  9. Describe a SIMPLE plan.
  10. Explain the differences between a tax-deductible and non-deductible traditional IRA. What is the major benefit regardless of contribution year tax deductibility?
  11. Compare and contrast a traditional IRA and the Roth IRA on the following: tax consequences in the contribution year, tax consequences during the withdrawal years after age 59½, withdrawals and minimum distribution requirements (usually referred to as RMDs), and contribution amount.
  12. List the features of the Coverdell Education Savings Account (ESA).
  13. Explain an annuity, an immediate annuity, and a deferred annuity. What are the tax consequences of an annuity purchase?
  14. What consumer caveats, or warnings, should you consider before purchasing an annuity?

Just Do It!! Acting on What You Learned

Because Internet sites change frequently, the uniform resource locator (URL) for the specific tool or page is not given below. Instead, the URL for the site, and instructions for navigating within the site are provided. It is our hope that this method will encourage you to explore and learn from the site, and more importantly, avoid the message: “Error: Site Not Found.”

Disclaimer: References to commercial sites are not an endorsement of the company or the financial products or services offered. These sites are included only because of their educational value; sites provided by competing companies may offer similar benefit. We encourage you to explore other sites of your choice.

1. To estimate your retirement needs, use the Ballpark E$timate available at www.asec.org provided by the American Savings Education Council. Use the Personal Earnings and Benefit Estimate Statement provided by the Social Security Administration to estimate your Social Security benefits. Next, acquire an estimate of benefits from your third-party retirement investment company or your personnel or employee assistance office. Finally, if applicable, contact the financial professional or investment company that manages your IRA investment(s) to get an estimate of your projected payout(s). Combine the amounts to see if you are saving enough or need to increase savings. Given this information, develop an action plan to secure your retirement.


2. Many large mutual fund companies offer retirement planning information and calculators on their Internet sites. Visit one of the following or others that you have discovered to learn more about retirement savings options:

3. While browsing the mutual fund Internet sites listed above, or others of your choice, review the requirements to open an IRA account. Or, speak to someone at your bank, or another financial professional, about opening an IRA or SEP, if applicable, account. Many people postpone saving for retirement because of common misconceptions that opening the account is complex and requires the full annual contribution. “Do your homework” to realize that these misconceptions are false, and start saving more to secure your retirement income.

4. Remember some fundamental principles as you plan for retirement. Balance risk and return and be sure to match your asset allocation to your risk tolerance and your time horizon. There is risk in being too safe with your investments. Conversely, taking on too much risk in an effort to play catch-up can be detrimental to your long-term plans. Evaluate your risk tolerance, retirement needs or goals, and your asset allocation to make sure you are on track. For help, review Unit 2 or study Lesson 15 of the Money 101 curriculum available at http://www.money.com/money/101.

5. Visit www.401kafe.comto learn more about 401(k) plans or www.403bwise.com to learn more about 403(b) plans.

6. Visit www.rothira.com to learn more about this retirement planning tool or to determine the tax consequences of converting a traditional IRA to a Roth IRA.

7. In considering your retirement savings options, review your plan eligibility. For example, in addition to your employer-provided retirement plan at work, you could open a traditional or Roth IRA account, contingent upon your age and tax considerations. If you are self-employed, even on a part-time basis, you could consider adding a SEP or other self-employed plan. Finally, although there are no tax consequences beyond tax-deferred growth, you could consider an annuity purchase. Be sure to consider the tax implications and availability of an employer match when making your selections. But do not ignore the potential benefit of saving for retirement with multiple plans.

8. Unit 7 cites two references to help consumers compare insurance companies and the annuity products sold. In addition, insurance company rating services assess a company’s financial strength and ability to pay off a claim. Reports are available directly from the following companies for a small fee, or in the library:

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