Investment and Retirement Basics Flashcards

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

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

Traditional IRAs offer upfront tax deductions with taxable withdrawals; Roth IRAs use after-tax dollars but provide tax-free withdrawals in retirement.

What does asset allocation mean in investment planning?

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

Asset allocation distributes portfolio funds across different asset classes to balance risk and potential return.

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

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

Compound interest earns interest on interest, creating exponential growth that makes early saving dramatically more powerful.

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

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

An employer match is essentially free money, representing an immediate 50-100% return on the employee's contribution.

What is the risk-return tradeoff principle?

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

The risk-return tradeoff means that potential for higher returns comes with greater risk, while lower-risk investments offer more modest returns.

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

Answer: Age 50, allowing higher limits to accelerate retirement savings

Starting at age 50, individuals can make additional contributions above standard limits to help those behind on savings.