The Ultimate 401(k) Quiz

By: Staff

4 Min Quiz

Image: refer to hsw

About This Quiz

You're aware of defined contribution plans and 401(k) from your previous place of work. But you're now at a new job and you no longer want to have anything to do with your former employer. Is 401(k) for you? Will it protect your financial rights? For the latest facts, figures and important things to know, take this quiz.

Where is the name 401(k) derived from?

The "401" is a reference to section 401 of the Internal Revenue Code. The "k" refers to section "k".

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In what year was the 401(k) plan proposed and how long did it take for the final regulations to come into effect?

The 401(k) plan proposal was in 1981, but it took a full 10 years before the final regulations were in place.

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Under a defined contribution plan, who defines what?

The employer or employee defines the amount to be contributed.

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How is 401(k) different from other retirement plans regarding taxation?

With other retirement plans, taxes are calculated according to the gross salary, then the money is put aside. Under 401(k), the money is put aside, then the taxes are calculated, so you end up saving money.

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Which of these is a drawback specific to the 401(k) retirement plan?

If you withdraw your money before age 59½, you pay taxes and a 10% fine to the IRS.

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Is there a limit to how much you can put into your 401(k) account every year?

Yes, there is a limit. It's referred to as the 415 limit.

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You've changed jobs and you no longer want to keep your money in your former employer's plan. What can you do?

You have two choices: roll over the money into a new plan or keep it where it is. In either event, carefully check into the criteria and details of each option.

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If you're not sure how much money you want to put into your 401(k) account monthly, on what should you base your decision?

Make your decision by bearing in mind the state of the economy, how stable your job seems and how much of your monthly salary you can manage without.

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You just received a pay raise. Meanwhile, your employer contributes a flat rate to your 401(k). What should happen now?

If the employer has been contributing a flat rate, he should now raise it according to your pay raise.

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Most 401(k) plans offer _____, such as stock mutual funds.

They usually offer a variety of investment choices. One of these is stock mutual funds.

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How secure are U.S. Treasury securities?

U.S. Treasury securities are considered to be very secure, with a small, steady growth.

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In a nutshell, when you buy stocks in a company, you are buying:

Buying stocks means that you're buying a little part or share of the company.

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In terms of risk level, what does a conservative route entail?

That's why it's conservative -- it entails minimal risk with low returns but a low chance of losses. The less conservative the route, the higher the chance of losses.

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When choosing to invest in an index fund, such as S&P 500 index, what annual average return is considered the optimum?

An index fund with about 11% average annual returns is ideal.

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What does a fund's past performance often indicate?

A fund's past performance is a common sign indicating its future likelihood of success.

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What is the advantage of diversifying one's portfolio of funds?

By diversifying your portfolio, you keep your risk in balance. When one fund goes down, another might go up so you effectively don't keep all your eggs in one basket.

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Economists and investors recommend having no more than what percentage of your portfolio in one stock?

They generally recommend having no more than 20% of your portfolio invested in one stock.

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What benefit to employers get out of contributing to 401(k) plans?

Employers contributing to 401(k) are benefited in being able to recruit good employees with great incentive to work hard at their jobs.

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What would be considered a top-heavy company investment plan?

A top-heavy plan is when more than 60% of the assets come from key employees.

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Why does the IRS mandate nondiscrimination tests every year?

The IRS mandates nondiscrimination tests to ensure that employees are aware of their plan, take advantage of it and receive equal benefits.

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