HDFS 238 Exam 3 | HDFS 238 - Personal Finance, Quizzes of Business Finance

Download HDFS 238 Exam 3 | HDFS 238 - Personal Finance and more Quizzes Business Finance in PDF only on Docsity! TERM 1 Financial Planner DEFINITION 1 Investment professional who evaluates personal finances...and recommends strategies to set and achieve long-term financial goals. Help in all area of financial life TERM 2 Types of Financial Planners DEFINITION 2 Commission-only = receive commission on products sold, good if you make a limited # of transactions Fee-based = charge an up-front fee AND a commission on products sold, receive unlimited advice, consultation Fee-offset = annual or hourly fee charged, fee reduced by commission paid on products sold Fee-only = no commission, only a fee-for-service, don't have ability to sell financial products, receive unbiased advice, tricky to find TERM 3 CFP DEFINITION 3 Certified Financial Planner = Comprehensive planning, go through rigorous training TERM 4 CPA DEFINITION 4 Certified Public Accountant = tax planning and preparation, estate planning TERM 5 PFS DEFINITION 5 Personal Financial Specialist = financial credential for CPA's TERM 6 AFC DEFINITION 6 Accredited Financial Counselor = financial counseling and money management TERM 7 RIA DEFINITION 7 Registered Investment Adviser = Investment adviser, help only in the area of investment TERM 8 Certified Financial Planner Board of Standards DEFINITION 8 Assists in the search for a CFP, handles complaints TERM 9 National Association of Insurance Commissioners DEFINITION 9 Area to check on planners and those who sell insurance products, make sure thy uphold to certain standards TERM 10 Financial Industry Regulators Authority DEFINITION 10 only oversees security brokers TERM 21 Policy Holder DEFINITION 21 Owner of policy who retains all rights given by the policy TERM 22 Face Amount DEFINITION 22 The amount of coverage given in the event of the policy holder's death TERM 23 Death Benefit DEFINITION 23 The amount that will be paid to the beneficiary TERM 24 Beneficiary DEFINITION 24 Person(s) who are designated to receive the death benefit TERM 25 Premium DEFINITION 25 Charge to the policy holder for insurance coverage (monthly, quarterly, or annually) TERM 26 DIME DEFINITION 26 D = Dependents, debt, death (cost of funeral/burial) I = Income (cover all dependents), Business M = Mortgage E = Education, Events TERM 27 Theory of Decreasing Responsibility DEFINITION 27 In early years you need more coverage because you have more debt, and in later years you don't need more coverage. In early years you may not need a lot of money but in later years you better have money. TERM 28 Term Insurance DEFINITION 28 Pure protection, face amount, time period (1, 5, 10, twenty year periods), must renew, low premium, you don't get your money back if it runs out, pays benefits only if the insured dies within the period paid for TERM 29 Cash Value Insurance DEFINITION 29 Permanent/whole coverage, no need to review, Investment/savings element , higher premium, commission for sales, loans, premium never goes up, pays benefits at death TERM 30 Term Insurance Types 1 DEFINITION 30 Guaranteed Renewable Term = typical for term, protects against becoming uninsured Level-Premium Term = avoid increasing premiums with age, premiums set at average rate over time, can cover for terms from 5 to twenty years TERM 31 Term Insurance Types two DEFINITION 31 Decreasing Term = as you age you should have less expenses Convertible Term = contribute a big lump sum Group Term = employee, group coverage TERM 32 Why are males more expensive to insure? DEFINITION 32 Because females live longer TERM 33 Cash Value Insurance Types 1 DEFINITION 33 Limited-Pay Insurance = premiums paid for period of time, twenty-pay life policies (pay for everything in twenty years), paid at 65 policies (higher premiums), protected for life Adjustable Insurance = Allowed to adjust premiums, face amount, and cash value accumulation Universal Insurance = Whole, variability of face value rate of cash-value, premiums and rate of return TERM 34 Cash Value Insurance Types two DEFINITION 34 Variable Insurance = You choose your investments, be careful choosing, face value and cash-value may vary, must have knowledge of markets Variable-Universal Insurance = Most popular, choose investments, higher returns, do your research, higher commissions, annual fees TERM 35 What do you need to think about in retirement? DEFINITION 35 Needs, wants, values, goals TERM 46 What to do with your defined contribution plan if you leave your employer DEFINITION 46 You can leave it, cash it in (bad idea) or transfer the money to a different account TERM 47 Cash-Balance Plan DEFINITION 47 Hybrid of the Defined Contribution and the Defined Benefit Plan gives each participant an interest-earning account credited with a percentage of pay on a monthly basis employer contributes 100% of funds...Employee contributes zero...Guaranteed rate of return don't have as much money to control on your own Less costly to employers, gives older workers smaller benefits TERM 48 Social Security DEFINITION 48 Federal insurance Contribution Act (FICA) authorizes Social Secrity and Medicare tax withdrawals from employee paychecks Paid into a trust fund account that then pays benefit to current retirees workers accumulate credits for employment (you get one credit if you earn $1090 during any one of the 90 day periods during the year), fully insured at 40 credits TERM 49 What is the full retirement age for Social Security? DEFINITION 49 If born after 1960, full retirement age is 67 TERM 50 Personal Retirement Accounts DEFINITION 50 Individual Retirement Account (IRA), you can put money in your account and don't have to initially pay taxes, opened by an individual can make one or more annual contributions when you take $ out, you may have to pay taxes but there are some exceptions (no retirement plan at work, married and no plan but your spouse does, if you have a non-working spouse) withdrawals can't begin until age 59 and a half, and no later than 70 and a half TERM 51 Roth IRA DEFINITION 51 Non-deductible, after-tax IRA Funds grow tax free Withdrawals are taken tax free IF taken at age 59 and a half or later from a 5 year account or older; no required distribution age Tax free withdrawals CAN be made for home-buyer expenses or education TERM 52 What makes the Roth IRA unique? DEFINITION 52 Money contributed has already been taxed. At the current time, the principal amount is never subject to future taxes or penalties. (as long as one follows contribution guidelines). Roth IRA contributions grow tax-deferred. Tax Deferred earnings become tax free. TERM 53 IRA Maximum Contributions DEFINITION 53 If you are under 50 years of age a the end of '11: Maximum contribution to a traditional or Roth IRA is $5,000 If you are 50 years of age or older before the end of '11: The maximum contribution that can be made to an IRA or Roth IRA is $6,000. (included is a catch up provision of $1000) Both may be reduced depending on your modified adjusted income TERM 54 Income Limits for Traditional IRA Contribution DEFINITION 54 Traditional IRA Single (if participating in employer sponsored plan) = $56,000-$66,000 Married Filing Jointly = $90,000-$110,000 Non-Active Participant Married to and Active Participant = $169,000-$179,000 TERM 55 Income Limits for Roth IRA Contribution DEFINITION 55 Roth IRA Single = $107,000-$1 2 2,000 Married, filing joint = $169,000-$179,000 Married, filing separate = $0-$10,000 TERM 56 Funding your individual Retirement Accounts DEFINITION 56 How do you Fund an IRA? make contributions transfer lump sums of money can have part of taxes go directly to it TERM 57 How to invest with earned income DEFINITION 57 Chose an investment, choose where you will buy it (bank, credit union, brokerage firm, mutual fund company) TERM 58 Rollover your funds DEFINITION 58 Move IRA money between institutions A distributions is made from the institutions disbursing the funds a check is made payable directly to the participant make a rollover contribution to a financial institution within 60 days can only be done once every twelve month and is reported to the IRS TERM 59 Self-employment options DEFINITION 59 Keogh = can be set up so self-employed/small business owners to prepare for retirement, can save up to twenty-five percent of self employment earned income: capped at $49,000 per participant, contributions can be made through age 70 SEP-IRA = retirement savings account for sole proprietor's self employment and owners of small business savings in profitable years, max contribution is $49,000, contributions 100% tax deductible and investment earnings grow tax deferred TERM 60 Annuity DEFINITION 60 Contract made with an insurance company that provides a series of payments usually monthly for a fixed or variable amount of time. People do this if they haven't saved enough by the time they want to retire. can involve high sales commissions and fees (can reduce your pay out amount); many restrictions TERM 71 Financial things to think about before getting married DEFINITION 71 Credit, net worth statement, income & expenses, risk tolerance, debt, loans, fixed expenses, level of income, financial trouble TERM 72 Steps to take when you get married DEFINITION 72 Merge your financial lives Inform employers of marriage (update documentation, benefits, health care, etc.) Financial and legal planning (update estate planning, wills, 401(k), IRAs, life insurance, etc. TERM 73 What is the average cost of a wedding in America? DEFINITION 73 $ 26,900-$30,000Hidden costs can include stamps, Band/DJ equipment, dress alterations, etc. TERM 74 Monetary decisions to make when you get married DEFINITION 74 Separate or joint checking accounts Single or dual earning household Children TERM 75 What do the majority of monetary problems stem from? DEFINITION 75 Communication, power and control (money can be used as a weapon) TERM 76 What to do pre-divorce DEFINITION 76 Get a P.O. Box, establish credit, inventory assets, choose attorney, chose a financial adviser TERM 77 Settlements after a divorce DEFINITION 77 Life insurance, pensions, retirement accounts, personal property, debt, child support, health insurance (covering kids), braces, college, weddings, taxes (who claims the kids as a dependent?) TERM 78 Why worry about college savings? DEFINITION 78 Rising college costs, tuition is greater than inflation rate, opportunity cost of borrowing money, possible return on saving TERM 79 Options for paying for college? DEFINITION 79 Current income, private and government funds, parents saving (IRA, Coverdell Savings, Section 5 29 Plan, custodial accounts) TERM 80 Benefits of Section 529 College Savings Plan DEFINITION 80 Benefits = withdrawals are not taxable, earnings are tax- deferred, Contributions are considered a completed gift, $13,000/$ 26,000 average for 5 year period, thus every 5 years could put in $65,000/$130,000 Beneficiary can be replaced (another child), Often low minimum investments, Use doesn't impact ability to take HOPE or Lifetime Learning Credit, states have different providers TERM 81 Drawbacks of Section 529 College Savings Plan DEFINITION 81 Long Term savings Vehicle, watch for = investment choices, brokers fees, high fees (annual fees, admin to state, admin to financial company, enrollment fee) TERM 82 Michigan's 529 Education Savings Plan (MESP) DEFINITION 82 You have a choice of investment options, low fees, no income limitations, federal and state tax free, and there is a Michigan income tax deduction on contributions ($10,000 for MFJ; $5,000 for Single) TERM 83 MI 529 Adviser Plan DEFINITION 83 Work with a financial adviser, open to all, allows a state income tax deduction of $5,000 (Single); $10,000 (MFJ). You have to participate within enrollment periods. TERM 84 MI Pre-Paid Tuition Plan DEFINITION 84 You can buy credits at today's prices that will remain the same value in the future. For example you can buy $4,000 worth of credits today, and in 15 years the $4,000 at a 7% interest rate will have turned into $11,000. This is assuming the student will attend in-state public school. TERM 85 Michigan Education Trust DEFINITION 85 Michigan tax deduction, students have 15 years to use the funds, it is a reduction off of your payroll that goes into an account for your child's education. Refunds are available for full scholarship, military enlistment, death or disability, and not attending college TERM 96 What determines eligibility for financial aid? DEFINITION 96 Student resources, parent resources (if a student is a dependent), full/part time student status TERM 97 Creative solutions for paying for educations DEFINITION 97 Home equity loan (be careful), retirement funds (ensure another plan is in place), certificated of deposits (laddering), savings bons - Discoutn or Series EE, Gifting strategies (option may be to write check directly to University and not to child in order to avoid the gift tax) TERM 98 American Opportunity Tax Credit DEFINITION 98 Credit up to $ 2,500 per eligible student, availible for the first 4 years of post-secondary education, forty percent of the credit is refundable, must be pursuing an undergraduate degree or other recognized educational credential, must be enrolled at least half time for at least one academic period, qualified expenses include tuition and fees, course related books, supplies and equipment, full credit is availible to eligible taxpayers who make less than $80,000 (single) or $160,000 (MFJ) TERM 99 Lifetime learning credit DEFINITION 99 Credit is up to $ 2,000/eligible student, availible for all years of postsecondary education and for courses to acquire or improve job skills, maximum credit is limited to the amount of tax you pay, student doesn't need to be pursuing a degree or other recognized education credential, qulified expenses include tuition and fees, course related books, supplies and equiptment, full credit is generally availible to eligible taxpayers who make less than $60,000 or $120,000 for MFJ TERM 100 Estate Planning DEFINITION 100 The winding down of your financial life, if you want certain things/money to go to certain people to avoid family drama when you die you should plan your estate TERM 101 Estate DEFINITION 101 Possessions and wealth less any debt TERM 102 Beneficiary DEFINITION 102 person or organization to receive benefit TERM 103 Probate DEFINITION 103 court supervised process, ensures transfer or decedent's assets TERM 104 Will DEFINITION 104 Document telling how assets are divided. Easiest and most inexpensive ($125-$400). Good to have at a minimum, good for uncomplicated situations, probate court assets according to your wishes provides instructions to the court. TERM 105 Executor of the will DEFINITION 105 person responsible for carrying out the will TERM 106 Codicil DEFINITION 106 allows a minor change to be made to a will TERM 107 Trust DEFINITION 107 Legal arrangement, person manages assets. Used to transfer assets and reduce estate taxes, help you avoid the expenses and time involved with probate (good for those close to federal tax limit), gift to beneficiaries, assets managed and distributed by predetermined schedule, types of trust (living trust, testamentary trust, revocable trust, irrevocable trust) TERM 108 Living trust DEFINITION 108 takes effect while living TERM 109 Testamentary Trust DEFINITION 109 takes effect upon death of the grantor TERM 110 Revocable Trust DEFINITION 110 grantor maintains the right to change or cancel terms at any time TERM 121 Intestacy DEFINITION 121 When a person dies without a legal will. Spouse w/o kids gets all of the estate, Spouse w/kids gets the first $150,000 and half of the probate estate. Children divide half of the probabte estate equally. Grandchildren take equal shares of what their parent would have taken TERM 122 Nonprobate Property DEFINITION 122 Property transfers immediately after death. Contracts established before death: beneficiary designations through life insurance, retirement plans, assets owned through joint ownership. Trust that designate who will receive property: living trusts, testamentary trusts TERM 123 Probate Property DEFINITION 123 Transferred by probate court in accordance with your will and the instecy laws of the state which you live in. TERM 124 Testacy DEFINITION 124 The will states who the estate is given to (spouse, child/children, significant other, charity) TERM 125 Taxes DEFINITION 125 Compulsory charges imposed by government on its citizens, the progressive nature of the federal income tax (a progressive tax is one that requires a higher tax rate as income increases) TERM 126 Do we pay taxes on all the money we make? DEFINITION 126 No! Only on the money we keep, our taxable income TERM 127 Total Income DEFINITION 127 All sources of income (cash, property, services, sale of assets, etc) TERM 128 Gross DEFINITION 128 All income that a taxpayer is required to decalre to the IRS TERM 129 Adjusted Gross DEFINITION 129 Gross income minus exclusions or adjustments TERM 130 Taxable Income DEFINITION 130 Income upon which you pay taxes, amount remaining after subtracting adjustments, deductions and exemptions from your gross income TERM 131 Two best kinds of income DEFINITION 131 Tax-Exempt Income (Income FREE of taxes). Tax Sheltered (or Tax Deferred) Income, income FREE of taxes in current year BUT you will pay taxes down the road TERM 132 Payroll Withholding DEFINITION 132 Employer takes a certain amount from an employee's income as a prepayment of an individuals tax liability for the year TERM 133 Self Employed Individuals and Taxes DEFINITION 133 Estimate taxes advance and submit quarterly installments on April 15, June 15, September 15, and following January 15 TERM 134 Schedule D Capital Gains and Losses DEFINITION 134 Short term gain/loss = sell an asset you have owned for less than one year, taxed as INCOME. Long term gain/loss = sell an asset you have owned for greater than one year (twelve months), key = taxed at a lower rate (maximum rate is 15% reduces your tax liability) TERM 135 How to keep more of your money Step 2 DEFINITION 135 Reduce your "gross" income before tax is computer, make adjustments to your income (allowable subtractions from gross income) examples are moving expenses, new job, student loan interest, "above the line deduction" TERM 146 Earned Income Tax Credit DEFINITION 146 Refundable tax credit for working families and individuals Federal - must have earned income and AGI less than a certain amount Federal Tax year '10 max credit TERM 147 1040 EZ DEFINITION 147 Single or MFJ, under age 65, no dependents, only tax credit to claim is EITC (EIC), wages are less than $100,000, taxable interest not over $1,500 TERM 148 1040 A DEFINITION 148 Income less than $100,000 and take standard deduction and/or take adjustments to income or tax credits TERM 149 1040 DEFINITION 149 Itemize deductions or take adjustments to income or tax credits OR you do or do not take contributions to a qualified retirement plan TERM 150 Publication 17 IRS DEFINITION 150 Provides information on "what's new" in the tax year TERM 151 Tax Free Assistant Programs DEFINITION 151 Free tax assistance at one of the many Volunteer Income Tax Assistance (VITA) sites around Michigan and on MSU's campus. Must have income of under $50,000. I-CAN! E-File is a web-based software written at a 5th grade literacy level and is available in English and Spanish TERM 152 Concerns for low income taxpayers DEFINITION 152 Refund anticipation loans = loans to taxpayers to file their taxes right away and receive their refund. They get the money early but have to pay a fee. TERM 153 What to do to save money when it comes to paying taxes DEFINITION 153 Sign-up for tax-advantages employee benefits at your workplace. Contribute to your employer-sponsored 401(k) retirement plan at least up to the amount of the employer's contribution. Buy a home to reduce income taxes. Do your own tax return so you can learn how to reduce your income tax liability. Maintain good tax records in case you are audited. TERM 154 PITI DEFINITION 154 Principle (paid monthly) Interest (paid monthly) Taxes Insurance TERM 155 Private Mortgage Insurance DEFINITION 155 If you borrow 80% of more of the value of a home, this protects your lender against mortgage default. It can be cancelled when equity rises about twenty %. You will probably have to keep the insurance for about 5 years even if you can pay twenty percent in two years. TERM 156 Down Payment DEFINITION 156 Portion of the housing cost paid up-front (not borrowed). Traditionally twenty percent of the total cost of the house is paid as a down payment. TERM 157 Formula for Home Buyers DEFINITION 157 Annual salary ( 2.5) = cost of the house you can afford Cost of the house/ 2.5 = the salary needed in order to afford that home TERM 158 Reverse Mortgage DEFINITION 158 Bank gives retired/older people money each month to pay for their home loan, and therefore the lender is now owning the home so they are kind of paying for it, age 65 and up. TERM 159 Equity DEFINITION 159 The value of a mortgaged property after deduction of charges against it. Beginning to own more and more of a home as time passes. TERM 160 Amorization Schedule DEFINITION 160 Payment schedule that is gradual and grows Start off paying interest Switch to paying of the actual price of the loan