PF2_Retirement Planning_S23

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Northern Arizona University *

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303

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Finance

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Feb 20, 2024

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Name: 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? In a company retirement plan, the process by which an employee comes to own the money that their employer gradually contributes to the retirement plan is known as vesting. Only company contributions are subject to vesting; an employee's own contributions to the plan are not. Vesting schedules can vary for every company and the employee might only be eligible for a portion of the contributions if they leave the company before the end of the vesting period. b. What percentage of income should you contribute to your 401(k) at a minimum? 3% to take full advantage of your company's benefits. c. Find (on the internet) and provide the 401(k) maximum contribution limit for 2023 for a person under 50. The maximum employee contribution limit for those under 50 is $22,500 as of 2023. 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? If you withdraw that money from your 401(k) account early that would result in a penalty, and you would have to pay the taxes. Also, that would set you back on your retirement goals and savings. 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? $6,500 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 an IRA account may entitle you to a tax deduction. Also, contributions to an IRA account are tax–deferred until you withdraw the money. c. When you make withdrawals in retirement, how are the distributions (the money you withdraw) taxed? During retirement, distributions are taxed as ordinary income. 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? $6,500 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? Contributions to a Roth IRA account are not deductible. Contributions to a Roth IRA account are also not tax- deferred because you must pay the tax when you make the contribution. c. When you make withdrawals in retirement, how are the distributions (the money you withdraw) taxed? Distributions for Roth IRA accounts are tax-free. 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? In order to contribute to both you have to be eligible and you have a limit of $6,500.

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? 20.613% b. How many dollars will you need to invest in the first year? $8,245 c. Refer to the schedule showing annual data. What will be your “Ending Retirement Balance” in the year (age) you expect to retire? 66 d. What will be your “Ending Retirement Balance” in the last year in the table (presumably the last year of your life)? $95,238 e. Will you have anything left to leave to your heirs? No 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? Both retirement planning and children's education are crucial components of anyone's financial planning. Between retirement planning and child education, I think it is always advisable to prioritize child education because it requires a substantial fund when you are in the middle of your working life and heavy spending on a child's education can then become a burden. There are additional social security options for retirement planning, such as employer contributions, government pension plans, and a bright future for your child, that can take care of your retirement life. b. What are 529 plans and what are their tax advantages?

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The 529 Plan is a savings program sponsored by states or educational institutions that encourages saving for future education costs while also offering tax benefits. Tax advantages are provided by 529 savings plans, including tax-free earnings growth and tax-free withdrawals for eligible expenses. 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 Plan: A Prepaid Tuition Plan enables the account holder to purchase units at participating colleges at the current price for the child's future tuition fees. These programs are supported by state governments, some of which guarantee the cost of tuition. The returns on investment from the prepaid tuition plan could be very low if the beneficiary does not enroll in the participating college or university. Education savings plans: These plans enable account holders to open investment accounts in order to save money for their children's future higher education, tuition, and other necessary expenses like housing. The invested money and returns can be used to pay for tuition at any school up to $10,000 per beneficiary per year. The investor has a variety of investment options, including bank deposit products, mutual funds, and exchange-traded funds. The flexibility of an education saving plan is increased by the availability of a variety of investment options, the state government's guarantee of all education plans, the freedom to select the college or university of one's choice, and financial aid for education up to $10,000 per year. d. Who are eligible beneficiaries of the funds invested in a 529 plan? - Child - Spouse - Stepchildren - Siblings - Father - Mother - In-laws