FiCEP Investment and Retirement Basics 2

Question 1

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

Accepted Answer

Traditional contributions are tax-deductible now with taxed withdrawals; Roth contributions are after-tax with tax-free withdrawals

Answer

They are the same account

Answer

Roth has no contribution limits

Answer

Traditional can only hold bonds

Question 2

What does asset allocation mean in investment planning?

Accepted Answer

Dividing investments among different asset classes based on risk tolerance and goals

Answer

Choosing a single stock

Answer

Allocating monthly income to bills

Answer

Transferring assets between family members

Question 3

What is compound interest and why is it significant for long-term savings?

Accepted Answer

Interest calculated on both principal and previously accumulated interest, creating exponential growth

Answer

Interest on the original principal only

Answer

Interest that decreases over time

Answer

Interest compounding only annually

Question 4

What is an employer match in a 401(k) and why should clients prioritize it?

Accepted Answer

Free money from the employer matching a portion of the employee's contribution

Answer

A fee the employer charges

Answer

A requirement to match the employer's contribution

Answer

A penalty for early withdrawal

Question 5

What is the risk-return tradeoff principle?

Accepted Answer

Higher potential returns generally carry higher risk; safer investments offer lower returns

Answer

Higher risk investments always lose money

Answer

There is no relationship between risk and return

Answer

Government bonds offer the highest returns

Question 6

At what age can individuals make catch-up contributions to retirement accounts?

Accepted Answer

Age 50, allowing higher limits to accelerate retirement savings

Answer

Age 65

Answer

Age 40

Answer

Age 62