Financial Literacy Flashcard

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What is a 401(k) plan?

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A 401(k) plan is a retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck before taxes are taken out.

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How are contributions to a traditional IRA taxed?

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Contributions to a traditional IRA are made with pre-tax income, meaning you pay income tax on the money when you withdraw it in retirement.

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What is the benefit of being 'fully vested' in a retirement plan?

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Being fully vested means that you have full ownership of the contributions made by your employer to your retirement plan, even if you leave the company.

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What is the difference between a traditional IRA and a Roth IRA?

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In a traditional IRA, contributions are tax-deductible, and taxes are paid upon withdrawal. In a Roth IRA, contributions are made with after-tax dollars, and withdrawals are tax-free.

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What does 'diversification' mean in investing?

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Diversification is the practice of spreading investments across various financial instruments, industries, and other categories to reduce risk.

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What is compound interest?

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Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.

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What is an indexed fund?

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An indexed fund is a type of mutual fund or exchange-traded fund (ETF) that aims to replicate the performance of a specific index, such as the S&P 500.

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What is the significance of the age 59½ in retirement accounts?

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Age 59½ is significant because it is the age at which individuals can begin to withdraw funds from retirement accounts like IRAs and 401(k)s without incurring a penalty.

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What is the purpose of a retirement savings plan?

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The purpose of a retirement savings plan is to help individuals save and invest money for their retirement, ensuring they have sufficient funds to support themselves after they stop working.

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What is the impact of starting to save early for retirement?

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Starting to save early allows individuals to take advantage of compound interest, leading to significantly larger savings by retirement age.