Personal Finance Planning Flashcards

What is the primary tax advantage of a traditional 401(k) plan?

Answer: Contributions reduce taxable income in the year they are made

Traditional 401(k) contributions are made pre-tax, reducing your taxable income in the current year; taxes are paid upon withdrawal.

How does a Roth IRA differ from a traditional IRA in tax treatment?

Answer: Contributions are after-tax; qualified withdrawals are tax-free

Roth IRA contributions are made with after-tax dollars, and qualified distributions in retirement are completely tax-free.

What is 'asset allocation' in investment planning?

Answer: Dividing investments among asset classes like stocks, bonds, and cash

Asset allocation is the strategy of distributing investments across different asset classes to balance risk and return.

A 30-year-old investor's portfolio should typically be MORE aggressive than a 60-year-old's primarily because:

Answer: Younger investors have more time to recover from market downturns

A longer investment horizon allows time to ride out market volatility, making higher-risk, higher-return assets more appropriate for younger investors.

What is the annual contribution limit for a Health Savings Account (HSA) for an individual in 2024?

Answer: $4,150

In 2024, the IRS HSA contribution limit for self-only coverage is $4,150.

Which insurance type protects income if an illness or injury prevents you from working?

Answer: Disability income insurance

Disability income insurance replaces a portion of your income if you are unable to work due to illness or injury.

What does 'diversification' mean in a personal investment portfolio?

Answer: Spreading investments across different assets to reduce risk

Diversification reduces risk by spreading investments so that a poor performance by one asset does not devastate the entire portfolio.