Term
| Prepaid College Savings Plans |
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Definition
Prepaid College Savings Plans
-May be used for specific college or state system + some out of state (FL plan) |
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Term
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Definition
Section 529 Plans
-Federal tax law allows earnings on these accounts to grow tax free if used for qualifying college expenditures |
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Term
| Three types of deductions |
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Definition
-Student loan interest up to $2,500 is an adjustment to AGI
-Above the line deduction for tuition and related expenses for post secondary education $4,000
-Business deduction under certain circumstances |
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Term
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Definition
| Hope credit = $1,800 per student for first two years of college (100% for first $1,200, 50% for next $1,200) |
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Term
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Definition
Financial Planners Say
-Start social security early at age 62
-Payoff mortgage
-Allocate 50/50 or 60/40 stocks/bonds early in retirement
-Assume 3% inflation (a big risk for retirees)
-Limit withdrawals to 4-5% of principal in retirement accounts
-Target income of $60-90k excluding social security |
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Term
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Definition
| Life insurance: whole life cash value can be converted into an annuity |
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Term
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Definition
| Employer Pension Plans - Defined Contribution |
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Term
| Money-purchase pension plans/Stock bonus plans/Profit-sharing plans |
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Definition
-Money-purchase pension plans - Percent of your earnings are set aside
-Stock bonus plans - Employer’s contribution is used to buy employer’s stock
-Profit-sharing plans - Employer’s contribution depends on the company’s profits |
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Term
| Salary reduction or 401(k); 403(b) plans |
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Definition
Salary reduction or 401(k); 403(b) plans...
-Employer makes non-taxable contributions |
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Term
| Employer Pensions - Defined Benefit |
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Definition
Employer Pensions - Defined Benefit
Employer will pay you a fixed amount per month when you retire based on your pre-retirement salary and number of years of service |
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Term
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Definition
| Portability allows you to carry earned benefits from one employer’s pension plan to another’s when you change jobs |
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Term
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Definition
| Vesting means you have worked for an employer long enough (3-5 years) to get a pension benefit, even if you take a position with another employer |
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Definition
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Term
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Definition
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Term
| Inappropriate investments |
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Definition
Inappropriate investments
-Undue concentration in employer’s stock
-Tax deferred investments or municipal bonds
-High risk investments
-Permanent cash investments (if young) |
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Term
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Definition
| An annuity is a life insurance product to provide a guaranteed income |
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Term
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Definition
-If you buy an annuity with your IRA, you can effectively pay yourself a pension after age 59.5
-If you bought the annuity with tax deferred funds (IRA), then all proceeds are taxable at ordinary rates |
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Term
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Definition
After tax contributions and interest earned are tax deferred, but taxed at ordinary rates
You pay taxes on the annuity interest as you withdraw them after you retire |
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Term
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Definition
-Variable annuities are frequently sold, but generally are NOT a good deal
-High fees and surrender charges
-Tax efficient mutual funds offer similar advantages at lower fee levels
-Income subject to ordinary rates, no benefit of capital gains rates |
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Term
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Definition
Growing Annuities
-Used in financial planning to determine the maximum real or inflation adjusted rate for withdrawals |
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Term
| Real rate = (1+NOMr)/(1+INFr) -1 |
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Definition
65 year old with $1 million wants to withdraw an amount today increased by 3% inflation each year for 20 years, while earning 8%
Real rate = 1.08/1.03 – 1 or 4.8543689% |
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Term
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Definition
Begin mode
Pmt/yr = 1
PV = 1,000,000
FV = 0
Int = 4.8543689
N = 20
Pmt = (75,585.53) today
Pmt next year = 75,585.53 x 1.03 = 77,853.10 |
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Term
| Social Security (Third rail) |
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Definition
Withholdings are made for
-Old Age, Survivors, and Disability Insurance (OASDI)…6.2% of earnings up to $106,800 in 2009 (this amount is annually escalated for inflation)
-Medicare… 1.45% of earnings (no cap)
-For most people, this means 7.65% of your salary is withheld for your retirement pension and health |
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Term
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Definition
| Up to 85% of your benefit may be subject to federal income tax depending on your other sources of income, such as interest income |
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Term
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Definition
| A bigger financial issue than social security that no one wants to discuss! |
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