Chapter 6.3, Problem 1R

To determine

To analyze: The importance of the terms: pension plans, Keogh plan, individual retirement account, Roth IRA, diversification.

Explanation of Solution

Pension plans - Pension schemes act as a means of financial stability and post-retirement security. It is an insurance scheme offering financial compensation for the elderly that is funded by a business fund.

Keogh plan - The Keogh plan may be set up as either a defined-benefit or a defined-contribution plan, but most programmes are defined as a defined contribution. Contributions are typically tax-deductible up to a certain percentage of annual income, with applicable absolute limitations in U.S. dollar terms, which the Internal Revenue Service (IRS) may differ from year to year.

Individual retirements account (IRA) - The IRA is an account developed at a financial institution that allows a person to save for retirement on a tax-free or tax-deferred basis.

Roth IRA - The Roth IRA is an individual retirement account (IRA) that allows for eligible withdrawals on a tax-free base provided that certain criteria are fulfilled. Roth IRAs are supported with post-tax dollars; the donations are not tax-deductible. But if anyone starts withdrawing cash, the money is tax-free.

Diversification - Diversification is a strategy that reduces risk through the distribution of assets between different financial instruments, enterprises and other categories. It aims to optimize returns by investing in various areas that will respond differently to the same occurrence.