College Math Unit 5 Final Exam Review

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What is a Roth IRA?

Back

A Roth IRA is a type of individual retirement account that allows qualified withdrawals on a tax-free basis, provided certain conditions are met.

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What does it mean for an investment to be compounded monthly?

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Compounding monthly means that the interest earned on an investment is calculated and added to the principal balance every month.

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How do you calculate the monthly withdrawal amount from a retirement account?

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To calculate the monthly withdrawal amount, use the formula for the present value of an annuity, considering the total amount saved, the interest rate, and the number of periods.

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What is the formula for the future value of a series of cash flows?

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The future value of a series of cash flows can be calculated using the formula FV = P * [(1 + r)^nt - 1] / r, where P is the payment amount, r is the interest rate per period, and nt is the total number of payments.

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What is the significance of a marginal tax rate?

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The marginal tax rate is the rate at which the last dollar of income is taxed, which affects how much tax is saved on withdrawals from tax-advantaged accounts.

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How do you determine the total amount in a retirement account after a certain number of years?

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To determine the total amount in a retirement account, calculate the future value of the initial investment plus the future value of any additional contributions made over time.

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What is the difference between a Roth 401(k) and a regular 401(k)?

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A Roth 401(k) allows for tax-free withdrawals in retirement, while a regular 401(k) provides tax-deferred growth, meaning taxes are paid upon withdrawal.

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What is the impact of compounding interest on long-term investments?

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Compounding interest significantly increases the total amount earned on an investment over time, as interest is earned on both the initial principal and the accumulated interest.

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How do you calculate the effective annual rate (EAR) from a nominal interest rate?

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The effective annual rate can be calculated using the formula EAR = (1 + r/n)^(nt) - 1, where r is the nominal interest rate, n is the number of compounding periods per year, and t is the number of years.

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What is the purpose of retirement accounts like IRAs and 401(k)s?

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Retirement accounts like IRAs and 401(k)s are designed to help individuals save for retirement while providing tax advantages.