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web.groovymark@gmail.com
- December 18, 2024
Question 01
What is the purpose of a “health savings account” (HSA)?
a) To pay for daily expenses without taxes
b) To provide a tax-advantaged way to save for future medical expenses
c) To replace traditional health insurance
d) To pay for non-medical expenses tax-free
Answer: b) To provide a tax-advantaged way to save for future medical expenses
Explanation: An HSA allows individuals to save money for future medical expenses in a tax-advantaged way. Contributions, earnings, and withdrawals for qualified medical expenses are tax-free.
Question 02
What is a “COBRA right” in health insurance?
a) It guarantees health insurance coverage for life
b) It allows former employees to remain part of a group health plan for a limited time
c) It provides immediate free health insurance upon job loss
d) It eliminates the need for private health insurance
Answer: b) It allows former employees to remain part of a group health plan for a limited time
Explanation: COBRA allows former employees to continue their employer-provided health insurance coverage for up to 18 months after leaving a job, though they must pay the premiums.
Question 03
Which of the following describes “copay” in health insurance?
a) The amount you pay for prescriptions after insurance
b) The portion of your health care cost that you must pay at each visit
c) A refundable fee for medical services
d) The annual deductible for health insurance
Answer: b) The portion of your health care cost that you must pay at each visit
Explanation: A copay is a fixed amount that you are required to pay for each visit or prescription when receiving a covered service under your health insurance.
Question 04
What does “portability” refer to in a retirement plan?
a) The ability to withdraw funds without penalty before retirement
b) The ability to transfer retirement funds from one employer to another
c) The capacity to invest in foreign markets
d) The protection of retirement funds from taxes
Answer: b) The ability to transfer retirement funds from one employer to another
Explanation: Portability allows employees to transfer their retirement savings to another account or employer when they change jobs, ensuring that they don’t lose their benefits.
Question 05
What is the function of “graduated vesting” in retirement plans?
a) To allow employees immediate access to all employer contributions
b) To increase the percentage of vested employer contributions over time
c) To limit employee access to contributions
d) To provide a fixed interest rate on all investments
Answer: b) To increase the percentage of vested employer contributions over time
Explanation: Graduated vesting schedules increase the percentage of an employer’s contributions that an employee can keep based on the length of service, with full vesting often achieved by year six.
Question 06
Which type of tax-sheltered retirement account is funded with after-tax money?
a) Traditional IRA
b) Roth IRA
c) 401(k)
d) SEP IRA
Answer: b) Roth IRA
Explanation: A Roth IRA is funded with after-tax money, meaning contributions are not tax-deductible, but withdrawals in retirement are tax-free.
Question 07
What is a “hardship withdrawal” in a 401(k) plan?
a) A loan taken against retirement savings without penalty
b) A penalty-free withdrawal allowed in cases of immediate and significant financial need
c) A loan that must be repaid with interest
d) A non-taxable withdrawal for medical expenses
Answer: b) A penalty-free withdrawal allowed in cases of immediate and significant financial need
Explanation: Hardship withdrawals allow individuals to withdraw from their 401(k) in cases of serious financial hardship, although taxes may still apply.
Question 08
Which of the following is a feature of “automatic escalation” in retirement savings?
a) It automatically increases your retirement income when you turn 65
b) It raises the contribution rate to a retirement account automatically over time
c) It decreases the risk level of investments as retirement nears
d) It adjusts the tax rate on retirement withdrawals
Answer: b) It raises the contribution rate to a retirement account automatically over time
Explanation: Automatic escalation increases the percentage of salary contributed to a retirement account each year, helping individuals save more as their income rises.
Question 09
What is the primary benefit of having “matching contributions” in a retirement plan?
a) To reduce the employee’s tax burden
b) To receive additional contributions from the employer, boosting retirement savings
c) To protect the employee’s retirement account from market downturns
d) To allow early withdrawal without penalty
Answer: b) To receive additional contributions from the employer, boosting retirement savings
Explanation: Matching contributions are made by the employer to the employee’s retirement account, effectively increasing the total amount saved without additional contributions from the employee.
Question 10
What does “required minimum distributions” (RMDs) refer to?
a) The maximum contribution limit for retirement accounts
b) The amount of retirement funds you must start withdrawing after a certain age
c) The minimum amount you must contribute to keep a retirement account active
d) The mandatory investment in government bonds
Answer: b) The amount of retirement funds you must start withdrawing after a certain age
Explanation: RMDs are the minimum amounts that retirement account holders must begin withdrawing annually after reaching age 72 to avoid tax penalties.
Question 11
Which of the following is an advantage of a “spousal IRA”?
a) It allows both spouses to combine their retirement savings into one account
b) It enables a non-working spouse to contribute to a tax-deferred retirement account
c) It allows for tax-free withdrawals at any time
d) It guarantees employer matching contributions
Answer: b) It enables a non-working spouse to contribute to a tax-deferred retirement account
Explanation: A spousal IRA allows a non-working spouse to contribute to an IRA based on the working spouse’s income, providing tax-deferred growth for retirement.
Question 12
What is the “20 percent withholding rule” in retirement accounts?
a) A rule that applies to early withdrawals, where 20% of the funds are withheld for taxes
b) A rule that limits the amount of contributions to a retirement account
c) A rule that prevents individuals from withdrawing more than 20% of their balance at a time
d) A rule that sets the minimum withdrawal limit to 20% of the total balance
Answer: a) A rule that applies to early withdrawals, where 20% of the funds are withheld for taxes
Explanation: The 20 percent withholding rule applies to early withdrawals from retirement accounts to cover potential taxes owed on the distribution.
Question 13
What is the “early withdrawal penalty” for retirement accounts?
a) 5% of the total balance
b) 10% penalty on top of the taxes owed for early withdrawals
c) 15% penalty for any withdrawals before the age of 70
d) 20% penalty on contributions only
Answer: b) 10% penalty on top of the taxes owed for early withdrawals
Explanation: Most retirement accounts impose a 10% penalty for withdrawing funds before reaching the minimum retirement age, usually 59½, in addition to regular taxes.
Question 14
Which of the following defines a “tax-deferred” retirement account?
a) Earnings in the account are taxed immediately
b) Contributions and earnings grow tax-free, but withdrawals are taxed later
c) Withdrawals are tax-free at any age
d) All contributions are subject to an immediate 20% tax
Answer: b) Contributions and earnings grow tax-free, but withdrawals are taxed later
Explanation: Tax-deferred retirement accounts, such as traditional IRAs, allow contributions to grow tax-free until they are withdrawn, at which point taxes apply.
Question 15
What does the “one-rollover rule” state for IRAs?
a) Investors can make unlimited rollovers between IRAs each year
b) Investors can make only one rollover from one IRA to another within any 12-month period
c) Rollovers are only allowed for 401(k) accounts, not IRAs
d) Rollovers must include the entire balance of the account
Answer: b) Investors can make only one rollover from one IRA to another within any 12-month period
Explanation: The one-rollover rule limits investors to one tax-free rollover between IRAs within any 12-month period to prevent abuse of tax benefits.
Question 16
What is the purpose of “self-directed plans” in defined-contribution retirement plans?
a) To allow employers to make investment decisions for the employee
b) To give employees control over how their retirement funds are invested
c) To automatically adjust investments based on market conditions
d) To limit the risk exposure in retirement portfolios
Answer: b) To give employees control over how their retirement funds are invested
Explanation: Self-directed retirement plans allow employees to choose how their retirement funds are invested, providing flexibility and personal control over asset allocation.
Question 17
What is the “withdrawal rate” in retirement planning?
a) The rate at which taxes are deducted from withdrawals
b) The percentage of savings withdrawn annually to fund retirement
c) The interest rate applied to retirement account withdrawals
d) The total amount of money withdrawn over a lifetime
Answer: b) The percentage of savings withdrawn annually to fund retirement
Explanation: The withdrawal rate is the percentage of a retirement nest egg that is withdrawn each year to support living expenses in retirement, often calculated to ensure that savings last throughout retirement.
Question 18
What is “lifestyle creep” in personal finance?
a) An increase in savings as income rises
b) Spending more as income increases, often leading to financial strain
c) A gradual reduction in expenses as retirement approaches
d) The adjustment of spending to match inflation
Answer: b) Spending more as income increases, often leading to financial strain
Explanation: Lifestyle creep occurs when individuals spend more money as their income rises, often leading to financial problems as spending grows to match higher earnings.
Question 19
What is the purpose of “FICA taxes”?
a) To fund government retirement programs such as Social Security and Medicare
b) To provide tax credits for low-income workers
c) To reduce the cost of employer-sponsored health insurance
d) To finance state pension systems
Answer: a) To fund government retirement programs such as Social Security and Medicare
Explanation: FICA taxes are payroll taxes that fund Social Security and Medicare, helping provide benefits for retirees and individuals with disabilities.
Question 20
What is “maximum taxable yearly earnings” (MTYE) in the context of FICA taxes?
a) The maximum amount of income subject to FICA taxes
b) The total amount of FICA taxes an employer must pay
c) The minimum amount of earnings needed to qualify for Social Security
d) The percentage of wages that must be paid into Medicare
Answer: a) The maximum amount of income subject to FICA taxes
Explanation: MTYE is the cap on how much of an individual’s annual income is subject to Social Security taxes under FICA; income above this amount is not taxed for Social Security.
