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Exam 25: Extension: Managing Personal Finances

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Question 111

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Bob has decided to contribute $2,800 to a Roth IRA. He is currently in the 25% tax bracket. How will his contribution affect his income tax for the current year?

A) It will reduce the amount of taxes he owes in the current tax year by $700.
B) It will increase the amount of taxes he owes in the current year by $700.
C) It will reduce the amount of taxes he owes in the current year by $2,100.
D) It will have no effect on the amount of taxes he owes this year.

E) C) and D)
F) B) and C)

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Question 112

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Financial planners encourage individuals to borrow only to cover immediate expenses.

A) True
B) False

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Question 113

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Withdrawals from an IRA prior to age 59½ generally are subject to taxes and a penalty.

Approximately what percent of the population is successful in saving enough money for retirement to live comfortably?

The three factors that have the greatest influence on how the value of your home increases over time are: (1) size (square feet), (2) age, and (3) design features.

Identify and discuss the six steps that individuals can take to gain control of their personal finances.

Most financial experts believe that the stock market is likely to grow more slowly in the future than it did in the last 50 years.

Withdrawals from a traditional IRA prior to the age of 59½ are:

Earnings from traditional IRA investments are taxable at the time they are earned.

According to contrarians, the big decline in the stock market during the early 2000s was:

Historically, the best place to invest has been in U.S. government savings bonds.

Financial planners encourage individuals to begin contributing funds into an IRA as early as possible. The major benefit of early and regular contributions is that:

From an investment viewpoint, it is a good idea to buy a large home in an area of town where homes are less expensive.

Which of the following deductible levels would result in the lowest premium for automobile insurance?

Harriett has just made out a will. The will names her brother Harold as the executor. This means that Harold will have the authority to take over Harriett's finances if she becomes incapacitated.

Even though they are in debt, most of today's college graduates are capital-rich.

Disability insurance provides a relatively low cost way of protecting against lost income due to an accident or illness that prevents you from working for an extended period of time.

Mini-Case Ira Roth and Penny Weiss met and married in the early 1990s, during their days at State University. Both came from families with limited financial resources. They had to work at part-time jobs during school, and still needed student loans to help pay for their college education. Ira and Penny shared a strong work ethic and had a great desire to succeed financially and enjoy the good life. Penny and Ira quickly experienced financial success in the latter half of the booming 1990s. Ira used his marketing major and extensive knowledge of computers to obtain a high-paying job in a successful dot-com business. Penny, who cleaned homes to earn money during college, used her experience to start her own business. Her entrepreneurial spirit surprised Ira and their friends, and she built a successful cleaning business with a growing base of residential clients and even a few commercial customers. She soon had to hire several part-time employees to keep up with demand. With money rolling in, Ira and Penny began to live the good life, buying an expensive new car, a state-of-the-art home entertainment center, and expensive wardrobes. As busy as they were, and as hard as they both worked, they often found it easier to dine at a nice restaurant rather than fix meals at home. When the dot-com bubble burst in the early 2000s, Ira was lucky enough to keep his job, but was forced to take a significant pay cut. The economic downturn forced some of the households and businesses that used Penny's company to cut back on professional cleanings, so her business suffered too. Soon the couple was struggling to pay the rent on their upscale apartment. They began relying on credit cards to cover expenses, but after a few months the credit limits on their cards had been reached. They fell behind in paying off their student loans and started getting some unpleasant calls from bill collectors. The stress and frustration led to arguments that began to threaten their personal relationship. With their personal finances out of control, Ira and Penny knew that they had to make changes to save not only their financial dreams, but also their marriage. However, they were at a loss as to where to start. Family members encouraged them to seek the advice of a financial planner. The couple reluctantly agreed that this was something they needed to do. -In saving for retirement, Penny could take advantage of the unique tax shelter offered only to small-business owners in a:

Buying a duplex and living in one side, while renting the other side, generally turns out to be more trouble than it is worth, since you have to satisfy not only your own needs, but also the needs of the renters.

Large corporations with at least 500 employees can offer their employees a simple 401(k) retirement plan that allows for greater contribution maximums.