Retirement Quiz

Retirement Questions (answers are below)

1. The average monthly Social Security retirement benefit for a retired couple is:

a. about $900
b. about $1000
c. about $1400
d. more than $1900

2.  Which of the following is often cited as the worst mistake made by participants in 401(k) plans:

a. Being too conservative with investment options, often allocating most of the funds to fixed income or low risk investments.
b. Investing too much in equity investments even though retirement is probably decades away.
c. Building a diversified portfolio of investment choices based on their time horizons and risk tolerances.
d. All of the above.

3.  Can a person contribute to their 401(k) plan and an IRA in the same year?

a. Yes
b. No

4.  Which person will have accumulated more in an IRA at age 65 assuming an earning rate of 8%?

a. One making $2000 annual contributions from age 26 to 36 and then stops contributions
b. One making $2000 annual contributions from age 37 to 65

5.  What is the maximum level of wages subject to Social Security tax?

a. $60,000
b. $985,500
c. $110,100

6.  Owning large amounts of your employer’s stock within your 401(k) plan is always a good idea.

a. True
b. False

7.  Which of the items below are not found in a Roth IRA?

a. Contributions are tax deductible.
b. Distributions after age 59 ½ are tax free.
c. A Roth IRA provides more flexibility for required distributions.
d. Contributions for 2012 are limited to $5000.

8.  Retirement benefits from Social Security are subject to income taxes:

a. Always
b. Never
c. Depends on your income

9.  When you retire (or change jobs) and get a distribution from your 401(k) plan:

a. You can spend the money without worry.
b. From that time forward, you have to pay taxes on the earnings on those funds.
c. You have 60 days to roll the money into another qualified plan or IRA to avoid paying income taxes.
d. You must deposit the funds into a FDIC insured savings account.

10. Social Security benefits can serve as the major building block for retirement:

a. True
b. False

11.  What is the limit for IRA contributions for 2012?

a. $2,000
b. $4,000
c. $5,000
d. $6,000

12.  When someone retires, his/her spending level usually falls by how much?

a. 10%
b. 20%
c. 30%
d. 40%

13.  If you are a participant in your employer's 401(k) plan, you cannot make an IRA contribution.

a. True
b. False

14.  An individual contributes $3000 a year to a regular IRA from age 30 to age 60.  At an earnings rate of 8%, what will their IRA be worth at age 60:

a. $90,000
b. $258,000
c. $340,000

1) D. In 2012, at the normal retirement, the average retirement benefit for a couple is about $1,994 per month. To reflect the impact of inflation, benefit levels are adjusted through annual cost of living adjustment.

2) A. Studies have shown that too many people do not take enough risk with their 401(k) plan investments, even if they are young with retirement being 20 or 30 years away. Historically, equity investments have provided better long-term returns than more conservative investments like bonds, cash or guaranteed insurance contracts. The long-term nature of a retirement plan facilitates taking the risk for the potential of those long-term superior results. However, it must be remembered that historical performance is not always a perfect predictor. As you approach your retirement, usually switching to more conservative investments is recommended.

3) A. If you are a 401(k) plan participant, you can still contribute to a regular IRA, but it will not be tax deductible.  In lieu of a regular IRA, you may be able to contribute to a Roth IRA subject to certain income limits.

4) A. Making earlier contributions allows compounding to work wonders. The person making only ten years of contributions would have accumulated $291,565. The one who delayed contributions, but made them for 30 years, would have accumulated only $226,566. Of course the best policy is to start early and keep making contributions.

5) C. For 2012, employees pay 6.2% and employers pay 6.2% Social Security tax on earnings up to $110,100. They also each pay 1.45% Medicare tax on all earnings.

6)  False. Company stock should always be evaluated just like any other investment. While it may be good “office politics” to load up on your employer’s stock, remember that your retirement security depends on the results of your investments.

7) A. Contributions to a Roth IRA are not tax deductible and may be limited based on of your income.  Roth IRAs provide a great deal more flexibility than a regular IRA since distributions can be deferred longer and can be tax free.  The contribution limit for 2012 is $5000 for those under age 50 and an extra contribution of $1000 is allowed for those age 50 and above.

8) C. It depends on your income. If a married couple filing a joint return has adjusted gross income above $32,000, one half of their Social Security benefits are taxable. If their income is above $44,000, 85% of the benefits are taxable.

9) C. When you receive a lump sum distribution from your employer’s qualified retirement plan, there are several decisions you must make within 60 days.  You can roll it into an IRA or your new employer’s plan (if the new plan permits) to avoid paying taxes.  If you choose the IRA option, you have more investment flexibility but the responsibility rests on your shoulders. 

10) False. While Social Security retirement benefits can be a source of income during retirement, most people find that significant additional savings are needed.  The average annual retirement benefit for a retired couple in 2012 is about $1,994.

11) C or D. For contributions made for 2012, the annual limit is $5,000. If the individual is over the age of 49, and additional contribution of $1,000 can be made. These rules apply for contributions made for regular and Roth IRAs.

12) B, C, or D. This one was a bit tricky as it depends on the individual. Most people find their income needs during retirement are between 60% and 80% of their pre-retirement needs. Work related expenses fall, but often the level of travel, entertainment and health care rise.

13) False.  Even if you are covered by your employer's qualified retirement plan, you can still make nondeductible contributions to a regular or Roth IRA (subject to certain income limitations). The earnings within the IRA will not be subject to current tax. If you use a traditional IRA for nondeductible contributions, the earnings will be taxed when they are withdrawn. With a Roth IRA, the earnings should never be taxed, but there are some limitations. Consult your tax advisor for a complete explanation.

14) C. Even though the individual only contributed a total of $90,000 ($3000 each year for 30 years), the value of the IRA would have grown to slightly under $340,000.  If the individual had earned 6%, the value would have been $237,000 and it would have been about $493,000 if the earnings rate had been 10%.  Remember though, as moneys are withdrawn from the regular IRA, income taxes would have to be paid.

Financial articles provided by WestStar Bank are for information purposes only and are not to be construed as tax or investment advice. Please consult with a tax and/or investment professional if you have any questions or doubts about any of the information containe

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