Chapter 14 Questions
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Chapter 14 Retirement Savings Planning Review questions
1.
What is YBE? What are pensionable earnings? What is the YMPE?
The year’s basic exemption (YBE) is the first $3500 of annual income. Pensionable earn-
ings refers to the amount of income you earn between the YBE and the year’s maximum
pensionable earnings (YMPE). The year’s maximum pensionable earnings (YMPE) is the
upper limit of your earnings that is subject to CPP contributions.
2.
What is a defined contribution pension plan? In a DCPP, who makes the investment deci-
sions?
Defined-contribution pension plans are employer-sponsored retirement plans where the
contribution rate, not the benefit amount, is based on a specific formula. The employee
can decide how you want the money to be invested and whether to change your invest-
ments over time.
3.
What is a TFSA? What are the similarities and differences between RRSPs and TFSAs?
A TFSA is a registered investment account that allows you to purchase investments, with
after-tax dollars, without attracting any tax payable on your investment growth. Similar to
RRSPs, unused contributions can be carried forward to the next year and the growth on
contributions is tax deferred. Unlike RRSPs, contributions into a TFSA account are not
tax deductible, withdrawals from a TFSA are tax-free, and when you make a withdrawal
one year, you can recontribute the money you withdrew the following year. With RRSPs,
once you make a withdrawal, you cannot make up for it by recontributing the amount
withdrawn at a later date, unless you are making the re-contribution to pay back an HBP
or LLP withdrawal.
4.
What is a locked-in retirement account (LIRA)?
A locked-in retirement account (LIRA), also known as a locked-in RRSP in some juris-
dictions, is a private pension plan that is created when an individual transfers vested
money from an employer-sponsored pension plan. The main purpose of a LIRA is to pro-
vide an opportunity for employees who leave a company pension plan to take the value of
their pension plan assets with them. Individuals who leave most provincially regulated
pension plans can transfer their pension assets to a LIRA. Individuals who leave a feder-
ally regulated pension plan and some provincially regulated pension plans can transfer
their pension assets to a LRSP.
Question 1
Collette is an employee of Dynamex Industries Inc. and earned $53 000 in 2020. How much will her employer deduct in CPP contributions based on an employee contribution rate of 5.25%? The
YMPE and YBE for 2017 are $58 700 and $3500, respectively.
Her employer will deduct $2,598.75 in CPP contributions. Calculated as:
= (The lower of annual income or YMPE − YBE) × 5.25 percent
= ($53 000 − $3,500) × 5.25 percent = $2,598.75
Question 2
Lloyd and Jean have no retirement plan at work, but they contribute a total of $4000 each year to
an RRSP. They are in a 30% marginal tax bracket. What tax savings will they realize for there contributions annually?
Lloyd and Jean will each save $1,200 in taxes: $4,000 × 30% = $1,200 Question 3
In need of extra cash, Troy and Lilly decide to withdraw $8000 from their RRSP. They are in a 30% marginal tax bracket. What will the tax consequences of this withdrawal be?
Troy and Lilly will have to pay ordinary income taxes of $2,400 on the withdrawal, calculated as: Ordinary income tax = $8,000 × 30% = $2,400
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(Assume that a pension plan offers to pay $300,000 on a person’s
retirement (his/her sixty-fifth birthday) or a semi-annual annuity for the remainder of the person’s life– i.e.,starting 6 months from
the date of retirement and including his/her date of death. Interest rates are 8 percentcompounded semi-annually
, and a person’s life expectancy has been determined statistically as being 85 years. Calculate the amount of the annuity that would make a person indifferent between the options?
Question 2
A person joins a pension plan at age 35. How much will she have to pay into the pension fund each year in order to accumulate a balance of $250,000 by the time s/he retires (age 65)? Assume that the payments start on his/her 35th birthday and the final payment is on his/her 60th birthday. Interest
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Question 13
You have a 401(k) plan, which is used for retirement savings, at work. If you plan to
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O future value of an annuity due
O present value of a lump-sum
future value of an ordinary annuity
present value of an ordinary annuity
future value of a lump-sum
Question 14
You deposit $3,250 into a savings account at a local bank. It will pay you 1.25%
compounded monthly for 2 years. To determine how much you will have at the end
of that time, which formula would you use?
future value of an annuity due
O future value of a lump sum
O present value of a lump-sum
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Suppose that at age 25, you decide to save for retirement by depositing $95 at the end of every month in an IRA that pays 4.25% compounded monthly. How much will you have from the IRA when you retire at age 65? Find the interest.
A.
$118,696; $73,096
B.
$120,485; $62,735
C.
$146,390; $100,790
D.
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Just Part B
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Provide correct answer
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Choose the best retirement plan for the employee from among those presented below. Effective interest is 12.68% pa.a. P1.4M now
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c. P1.65M on the 18th month
d. P100,000/month for 1 year plus P400,000 after one year
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Kal.4
Consider a retirement financial plan where you begin contributing at the age of 25. In this plan you make annual payment of $5000 until you reach the age of 50. Starting from the age of 60 and continuing until the age of 70, you receive annual payments of $15000 assuming an annual discount rate of 3% evaluate the worthiness of this financial plan.
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What should be the balance in a Registered Retirement Income Fund (RRIF) that will provide $2,500 at the beginning of each half-year for 5 years, if the RRIF earns 4.75% compounded quarterly?
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None
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PART A: Time Value of Money
Please indicate your final answers (rounded to the nearest dollar) in the boxes provided. Unless the problem states otherwise, assume annual compounding of interest.
1. You currently have a balance of $200,000 in your retirement account. You expect to contribute $7,500 to your retirement account at the end of each year for the next 30 years and your employer will match your contributions; thus, the annual end-of-year contributions to your retirement account will be $15,000. If you earn 8% on your retirement account, how much money will you have in your account when you retire in 30 years?
$
2. You have a 4-year-old daughter and want to have $120,000 in her college fund when she starts college. You expect to earn a 7% return on her college-fund investments. If you want to make 14 equal-sized end-of-year deposits into your daughter’s college fund, how much do you need to deposit each year to have…
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QUESTION 43
A student wants save for college which begins in five years. How much will the student save assuming equal deposits of $2,500 at the beginning of each year and 4% interest? Following are appropriate factors from tables:
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% / n
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Present Value of ordinary annuity of $1
Future value of annuity due $1
Future Value of ordinary annuity of $1
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his/her date of death. Interest rates are 7 percent compounded annually, and a
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