Dollars and Sense: 401(k) Challenge

Dollars and Sense: 401(k) Challenge
Image: istockphoto, Inc.

About This Quiz

401(k)plans are one of the most widely used retirement plans. How much do you know about managing yours? Take this quiz to find out.
What happens to the money you contribute to a 401(k)?
It goes straight to your employer as an investment in your company.
It's put into investments of your employer's choice.
A third party administrator offers you a choice of investments to put your money into.
The money is sent to a third party administrator who invests it in things like mutual funds, bonds and money market accounts. Your typical 401(k) plan may offer 20 or more investment choices.

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Which of the following isn't a feature of a 401(k) plan?
Contributions are taken from your pre-tax income.
You can withdraw from your account at any time without penalty.
A penalty is attached if you choose to withdraw or cash out of your plan before a certain age.
Your employer may opt to match your contribution as an incentive for you to invest.

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What age must you reach before you can draw from your 401(k) account without having to pay a penalty?
55.5
59.5
If you withdraw your money before you are 59.5 years old, you'll have to pay a 10-percent penalty fine to the IRS in addition to the tax on it.
65.5

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When changing jobs, which of the following is usually the least desirable option?
rolling your money over into a new retirement plan
keeping your money in your former employer's 401(k) plan
cashing out
While you have the option of cashing out, unless you are 59.5 you'll have to pay the tax and the 10-percent penalty to the IRS.

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As a general rule of thumb, if you're young and both the economy and your job are stable, you should invest:
aggressively
If the economy is doing well, your job is secure, and you don't have any large upcoming financial needs like kids going to college, you should probably be a little more aggressive with your contributions.
conservatively
not at all -- you'll do fine without it

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401(k) plans are part of a family of retirement plans known as:
pension contributions plans
defined benefit plans
defined contribution plans
401(k) plans are part of a family of retirement plans known as defined contribution plans. Other defined contribution plans include profit sharing plans, IRAs and Simple IRAs, SEPs, and money purchase plans. They're called "defined contribution plans" because the amount that's contributed is defined either by the employee (participant) or the employer.

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Which is not an existing incentive for employers to offer 401(k) plans?
The administrative costs are tax-deductable.
Companies get a portion of their employees' investment yield.
The overhead and administrative costs of the 401(k) plan, as well as any matched contributions the employer makes, are tax-deductible expenses. Also, to get the best and brightest employees, companies offer attractive benefit programs.
It encourages recruitment of quality employees.

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What is a top-heavy 401(k) plan?
a plan where your employer matches increasingly more cents on the dollar the more you contribute
a plan that invests heavily in large-cap funds
a plan where a large percentage of a company's overall contributions are for key employees
A plan that is "top heavy" has more than 60 percent of its assets coming from key employees. Key employees are those who are at least 5-percent owners of the company, earn more than $85,000 a year, or have a salary that ranks in the top 20 percent of salaries within the company. If lower-paid employees' contributions are lower than expected, then the highly compensated employees will be limited in how much they can contribute.

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What is a vesting schedule for 401(k) plans?
a tiered schedule for what percentage of your income you can contribute
a tiered schedule for when money the employer contributes to your account is actually yours
A vesting schedule is a tiered schedule for when money the employer contributes to your account is actually yours. For example, your employer may have a three-year vesting schedule that increases your ownership of the money by one-third each year. After three years, the money is all yours and all future contributions are 100-percent yours.
a tiered schedule for the penalty you have to pay depending on your age

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Which of the following funds are associated with being risky but possibly returning high investment returns?
small-cap funds
Small-cap funds typically invest in companies that have a market value of less than $1 billion. Small-cap funds can provide high investment returns but are also considered to be slightly risky.
mid-cap funds
large-cap funds

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You Got:
/10
istockphoto, Inc.

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