CPS Investment Strategies 2 — Questions and Answers
Question 1: An employee wants to maximize tax-deferred savings in a 401(k) plan. What is the IRS elective deferral limit for 2024?
- $20,500
- $22,500
- $23,000 (Correct answer)
- $19,500
Correct answer: $23,000
The IRS elective deferral limit for 401(k) contributions in 2024 is $23,000.
Question 2: Which investment vehicle allows employees to purchase company stock at a discounted price through payroll deductions?
- ESOP
- ESPP (Correct answer)
- Profit-sharing plan
- Stock appreciation right
Correct answer: ESPP
An Employee Stock Purchase Plan (ESPP) lets employees buy company stock at a discount, typically 5–15%, via payroll deductions.
Question 3: A 52-year-old employee wants to make additional retirement contributions beyond the standard limit. What provision allows this?
- Rollover contribution
- Catch-up contribution (Correct answer)
- Employer match
- Profit-sharing allocation
Correct answer: Catch-up contribution
Employees aged 50 and older may make catch-up contributions, which increase their annual deferral limit by an additional $7,500 in 2024.
Question 4: In a defined contribution plan, which party bears the investment risk?
- The employer
- The plan administrator
- The employee (Correct answer)
- The PBGC
Correct answer: The employee
In defined contribution plans, the employee bears the investment risk because benefits depend on account performance.
Question 5: What is the primary purpose of a target-date fund offered in a 401(k) plan?
- To maximize short-term returns
- To automatically shift to more conservative allocations as the target year approaches (Correct answer)
- To track a specific market index
- To provide guaranteed income at retirement
Correct answer: To automatically shift to more conservative allocations as the target year approaches
Target-date funds automatically rebalance toward more conservative investments as the participant approaches the target retirement year.
Question 6: Which type of IRA allows after-tax contributions with tax-free qualified withdrawals in retirement?
- Traditional IRA
- SEP IRA
- SIMPLE IRA
- Roth IRA (Correct answer)
Correct answer: Roth IRA
Roth IRA contributions are made with after-tax dollars, and qualified withdrawals in retirement are completely tax-free.
Question 7: An employer contributes 3% of each eligible employee's compensation to a SIMPLE IRA regardless of employee contributions. This is called a:
- Matching contribution
- Non-elective contribution (Correct answer)
- Profit-sharing contribution
- Safe harbor contribution
Correct answer: Non-elective contribution
A non-elective contribution is made by the employer for all eligible employees whether or not they contribute themselves.
CPS Investment Strategies 2
An employee wants to maximize tax-deferred savings in a 401(k) plan.
What is the IRS elective deferral limit for 2024?