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Quiz about Do You Understand Your US 401k Retirement Plan
Quiz about Do You Understand Your US 401k Retirement Plan

Do You Understand Your US 401(k) Retirement Plan? Quiz


Millions of Americans are enrolled in 401(k) retirement plans, but shockingly few understand how they work. I hope this quiz will help people to understand some concepts which may have a big impact on their retirement!

A multiple-choice quiz by tensainomiko. Estimated time: 4 mins.
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Author
tensainomiko
Time
4 mins
Type
Multiple Choice
Quiz #
265,572
Updated
Dec 03 21
# Qns
10
Difficulty
Average
Avg Score
7 / 10
Plays
805
Last 3 plays: Guest 66 (7/10), Guest 76 (9/10), Guest 50 (7/10).
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Question 1 of 10
1. Your employer deposits a profit-sharing contribution into your 401(k) account. However, this money is not automatically yours. In this particular plan, you receive 30% of the money if you leave the company after one year, 60% after two years, and 100% after three or more years. What is the term for this sort of schedule? Hint


Question 2 of 10
2. If a 401(k) retirement plan has "automatic enrollment," then the company can force an employee to contribute to the plan.


Question 3 of 10
3. Some US companies allow their employees to withdraw part of their account in the event of a financial hardship. However, many use a limited definition of hardship which only allows for six possible types of need. Which of the following would NOT qualify as a hardship according to that list? Hint


Question 4 of 10
4. Some participants in 401(k) retirement plans mistakenly expect it to work like a savings account: it's your money, and you can take it out any time you want, right? In actuality, the IRS places tight restrictions on when you can withdraw your 401(k) balance. Which of the following is NOT considered a "distributable event" that will let you take out your money? Hint


Question 5 of 10
5. What are the tax consequences if a typical 35-year-old leaves the company and then takes his 401(k) account balance in cash? Hint


Question 6 of 10
6. You have left your job, and you need to do something with your 401(k) account. You do not want to be taxed on the money, so you decide to move it into your own Individual Retirement Account (IRA.) What is the term for this transfer? Hint


Question 7 of 10
7. If you leave the company, and do not withdraw your account promptly, the employer may be able to "force" the funds out of the plan.


Question 8 of 10
8. If a person needs a little extra money, he may be able to take a loan against his 401(k) account. Which of the following is NOT true regarding the limitations placed on 401(k) loans? Hint


Question 9 of 10
9. Just as there are traditional and Roth IRAs, so there are traditional and Roth 401(k)s.


Question 10 of 10
10. Finally, what document would a typical employee read in order to better understand his 401(k) plan? Hint



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quiz
Quiz Answer Key and Fun Facts
1. Your employer deposits a profit-sharing contribution into your 401(k) account. However, this money is not automatically yours. In this particular plan, you receive 30% of the money if you leave the company after one year, 60% after two years, and 100% after three or more years. What is the term for this sort of schedule?

Answer: Vesting

Money which the employer contributes on your behalf is frequently subject to vesting, which gives you a certain percentage of the funds based on your length of service with the company. The exact vesting schedule varies from one plan to another, but current laws require all employer contributions to be 100% vested after no more than six years of credited service. Money which the employee contributes is always 100% vested.
2. If a 401(k) retirement plan has "automatic enrollment," then the company can force an employee to contribute to the plan.

Answer: False

Many plans now use automatic enrollment to increase participation. However, no individual can be forced to contribute. Rather, an employee who does not specifically elect otherwise will be enrolled by default. That employee always retains the right to contribute a different amount than the default, or not to contribute at all.
3. Some US companies allow their employees to withdraw part of their account in the event of a financial hardship. However, many use a limited definition of hardship which only allows for six possible types of need. Which of the following would NOT qualify as a hardship according to that list?

Answer: Automobile repairs required to commute to work

The six "safe harbor" hardships are as follows: college tuition; required medical expenses; funeral expenses; purchase of a primary residence; to avoid being evicted or having the mortgage foreclosed on a primary residence; and substantial repairs on a home due to a natural disaster. Crucial car repairs might qualify under the more general hardship definition, but many employers do not use that definition.
4. Some participants in 401(k) retirement plans mistakenly expect it to work like a savings account: it's your money, and you can take it out any time you want, right? In actuality, the IRS places tight restrictions on when you can withdraw your 401(k) balance. Which of the following is NOT considered a "distributable event" that will let you take out your money?

Answer: Reaching age 50

The list of distributable events includes retirement, disability, death, severance of employment, termination of the plan, financial hardship, and attainment of age 59-1/2. (Other, very limited circumstances also exist.) If none of these conditions are met, the balance cannot be taken out.
5. What are the tax consequences if a typical 35-year-old leaves the company and then takes his 401(k) account balance in cash?

Answer: Normal income tax plus a 10% penalty

Most of the funds in a 401(k) plan have never been taxed to the employee. Thus, taking the money in cash results in normal taxable income. In addition, a 10% early withdrawal penalty applies for most distributions taken before age 59-1/2. Certain exceptions to the penalty do exist, such as payouts to a disabled or deceased participant.

Typically a flat 20% will be withheld for taxes at the time of the payout, but the exact tax will be calculated on the person's income tax return. Depending on the individual's financial situation, this could result in a refund or in more taxes being owed.
6. You have left your job, and you need to do something with your 401(k) account. You do not want to be taxed on the money, so you decide to move it into your own Individual Retirement Account (IRA.) What is the term for this transfer?

Answer: Rollover

A rollover moves money between two investment vehicles, such as 401(k) plans or IRAs, without generating taxable income. It is a good way to keep your retirement funds in one centralized location, without having to worry about the 10% early withdrawal penalty.
7. If you leave the company, and do not withdraw your account promptly, the employer may be able to "force" the funds out of the plan.

Answer: True

If the vested account balance is below $5,000, the IRS allows the employer to forcibly pay out the account if it is not withdrawn promptly. Amounts below $1,000 can be forced out in cash, thus becoming taxable. Amounts between $1,000 and $5,000 can be forced into an IRA as a rollover. Accounts in excess of $5,000 cannot generally be forced out.
8. If a person needs a little extra money, he may be able to take a loan against his 401(k) account. Which of the following is NOT true regarding the limitations placed on 401(k) loans?

Answer: The amount of the loan is limited to the participant's account balance.

Generally speaking, a loan cannot exceed 50% of the participant's vested account balance, rather than the full balance. However, a few plans allow the loan to exceed that amount, up to a total of $10,000, so long as additional collateral is provided.

Other rules include a $50,000 maximum loan amount and the requirement that loans not be more readily available to the top employees than to the rank-and-file employees. Finally, loans must be considered "bona fide." That is, they must have a reasonable term and interest rate, and they must provide for level payment amounts at least quarterly.
9. Just as there are traditional and Roth IRAs, so there are traditional and Roth 401(k)s.

Answer: True

Beginning in 2006, some 401(k) plans began adding a Roth feature. While normal 401(k) contributions are made on a pre-tax basis, Roth contributions are made on an after-tax basis. When those funds are eventually withdrawn, the contributions themselves will not be taxed again, but the earnings might be.

In order for the earnings to be tax-free, the participant must have begun making Roth contributions at least five years beforehand, and must have reached age 59-1/2 or have died or become disabled.
10. Finally, what document would a typical employee read in order to better understand his 401(k) plan?

Answer: Summary Plan Description (SPD)

The Summary Plan Description contains the plan provisions in language which the average participant should be able to understand. It is required to be provided to every participant in the plan. The Adoption Agreement and Base Plan Document contain basically the same information, but are more high-level, and are not usually provided to employees; however, they must be shown to any participant who requests them.

The Administrative Services Agreement, as its name implies, is a contract between the employer and a separate company that has been hired to administer the plan.
Source: Author tensainomiko

This quiz was reviewed by FunTrivia editor trident before going online.
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