PF2_Retirement Planning_S23

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Northern Arizona University *

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101

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Finance

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Nov 24, 2024

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Name: Zachary Sutton Personal Finance Assignment #3 The following questions should be answered using the Retirement Planning class discussion, the Retirement Planning PPT slides, and completing internet research. This is an INDIVIDUAL assignment. Submit your answers in BbLearn on the due date listed in BbLearn and the syllabus. Handwritten answers are NOT acceptable. Use Microsoft Word or another word processing program to type your answers. Answers should be written in your own words, not copied and pasted from the internet. Retirement Planning 1. Most retirement plans today are of the defined contribution variety. An example is a 401(k) plan. Suppose your first employer after graduation from college offers a 401(k) plan, you will make contributions from each paycheck, and your employer will match your contributions up to 3% of your salary. a. Explain vesting in a company retirement plan. Does vesting apply to company contributions only, your contributions only, or to both? Vesting in a company retirement plan determines when employees gain full ownership of employer contributions. Vesting may apply to both company contributions and, in some cases, employee contributions. It establishes a schedule, such as cliff or graded vesting, to reward long- term commitment and retention. b. What percentage of income should you contribute to your 401(k) at minimum? You should contribute at least 10-15% to your 401K. c. Find (on the internet) and provide the 401(k) maximum contribution limit for 2023 for a person under 50. The maximum contribution limit for 2023 for a person under 50 is $22,500. d. People tend to change jobs more frequently today than they did in the past. Suppose you work for five years at your first firm, then change jobs to move to a better position with another firm. At your age, why would it be a bad idea to take your 401(k)-account balance in cash and go on vacation between jobs? Taking your 401(k) balance in cash and going on vacation between jobs would be a bad idea due to potential financial consequences. The cash withdrawal may incur taxes, penalties, and diminish your retirement savings, impacting your long-term financial security. 2. For individuals who do not have access to an employer-provided retirement plan, Individual Retirement Accounts (IRAs) are available. Suppose you open a tax-deductible IRA. a. How much can you deposit in the IRA account for 2023 if you are less than 50 years old? You can deposit up to $6,500 if you are under 50 years old.

b. How are the contributions treated for tax purposes? In other words, how does this contribution affect your taxes for the year the contribution was made? Contributions to a traditional 401(k) are generally tax-deductible in the year they are made. This means that the amount you contribute reduces your taxable income for that year, potentially lowering your overall tax liability. c. When you make withdrawals in retirement, how are the distributions (the money you withdraw) taxed? In a traditional IRA, withdrawals in retirement are taxed as ordinary income. Basically, when you take distributions from a traditional IRA, the amount withdrawn is added to your taxable income for that year, and you will owe income taxes on the withdrawn amount at your applicable tax rate. 3. A second type of IRA is the “Roth IRA.” Suppose you open a Roth IRA account. a. How much can you deposit into the account for 2023 if you are less than 50 years old? You can deposit up to $6,500 if you are under 50 years old. b. How are the Roth contributions treated for tax purposes? In other words, how does this contribution affect your taxes for the year the contribution was made? Roth contributions are made with after-tax dollars, so they don't provide a tax deduction in the year of contribution. Basically, Roth contributions do not reduce your taxable income for the year they are made. c. When you make withdrawals in retirement, how are the distributions (the money you withdraw) taxed? In a Roth IRA, withdrawals in retirement are generally tax-free. This includes both the contributions you made and any earnings or investment gains. 4. Can you contribute to both a Roth and Traditional (tax deductible) IRA in the same year? If yes, what is the 2023 combined contribution limit for a person less than 50 years old? Yes, you can contribute to both a Roth IRA and a traditional IRA in the same year. However, there are annual contribution limits that apply across both types of IRAs and for 2023 this limit is $6,500 for a person less than 50 years old. 5. Visit the retirement calculator on MSN: http://www.msn.com/en-us/money/tools/retirementplanner Fill in the age at which you expect to graduate from college in the current age box, as well as the income expected in your first job after college. Next, enter the age at which you want to retire and your life expectancy (age that you think you will live to). Enter current savings (if any), and desired annual income during retirement. You can change your pre- and post-retirement returns or leave them at 5%. After entering your information, click the “Calculate” button and the results will appear to the side. Click on the "schedule" button to show your retirement balances for use with questions 4.c.-e. a. What percentage of your annual income will you need to invest (save) to meet your retirement goal?

I would need to invest 21% of my annual income to meet my retirement goal. b. How many dollars will you need to invest in the first year? I would need to invest $12,396 in my first year. c. Refer to the schedule showing annual data. What will be your “Ending Retirement Balance” in the year (age) you expect to retire? My ending retirement balance at 65 would be $2,412,348. d. What will be your “Ending Retirement Balance” in the last year in the table (presumably the last year of your life)? My ending retirement balance at the last year of my life would be $38. e. Will you have anything left to leave to your heirs? I would have basically nothing left to leave to my heirs. 6. Later in life you may want to get married and have children. If you want to help your children pay for college the 529 Education Savings Plan is a good option. a. Whether or not you can save for your children’s college and your retirement will depend on your pay. If you can only afford one of these options which do you choose? I would choose to save for my children’s college because I technically don’t have to retire and can just work until I die. b. What are 529 plans and what are their tax advantages? 529 plans are tax-advantaged savings accounts created to assist with the cost of education. One of these plans' advantages is that withdrawals are free from both federal and state income taxes as long as the funds are allocated to approved educational costs. c. There are two main kinds of 529 plans: prepaid tuition plans and education savings plans. Explain each type of plan. Which option provides the greatest flexibility and why? Prepaid tuition plans allow you to prepay for tuition at today's prices. When the beneficiary attends college in the future, the plan covers the cost of tuition and, in some cases, other mandatory fees. Education savings plans allow you to invest money in a variety of investment options. The growth of the investments is tax-deferred, and withdrawals are tax-free when used for qualified education expenses, which can include tuition, room and board, and other related costs. The most flexible of these two options is the education savings plan because they allow you to use the funds for a broader range of educational expenses. d. Who are eligible beneficiaries of the funds invested in a 529 plan? The eligible beneficiaries of funds invested in a 529 plan are typically the future education expenses of a designated family member, such as a child or grandchild.

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