HW3 - Prajwal Kumar

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School

Pennsylvania State University *

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597B

Subject

Finance

Date

Apr 3, 2024

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docx

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Uploaded by BrigadierFishMaster1495

HW #3 1) Define and critically compare a traditional IRA to a Roth IRA. Traditional IRA: A traditional IRA is like a time-traveling piggy bank. You put money in, and poof! You get a tax break right now. It's like the government saying, "Cool, you don't have to pay taxes on this part of your money yet." But, when you're retired and start taking out cash, Uncle Sam shows up and says, "Remember that tax break? Now it's payback time!" Roth IRA: Now, a Roth IRA is like planting a tax-free money tree. You put in money you already paid taxes on—no instant tax break. But, when you're older and ready to grab some cash from your Roth piggy bank, it's all yours! No taxes, no IOUs. It's like the government saying, "You paid your taxes upfront, so enjoy your money without worrying about us taking a slice later." Comparison: So, it's like choosing between a quick high-five now (Traditional IRA's tax break) or a high-five later (Roth IRA's tax-free withdrawals). The decision depends on whether you want a tax break today or want your money to grow tax-free for tomorrow. It's a bit of a time-traveling money adventure with taxes, and your choice depends on when you want to face them - now or in the future!

2) Define and critically compare a traditional 401(k) to a Roth 401(k). (Keep the answer to one page please). Traditional 401(k): Think of a traditional 401(k) as a tax-saving superhero. You stash money from your paycheck into it, and bam! Your taxable income shrinks right away. It's like a secret code that tells the taxman, "I need a break now." But hold on, when you retire and start pulling out money, that's when the taxman shows up. You pay taxes on what you take out, like repaying the superhero for their help. Roth 401(k): Now, meet the Roth 401(k) - the tax-free adventurer. You put in money you've already paid taxes on. No immediate tax break, but here's the magic: when you're retired and grabbing cash, it's all yours! No tax villains swooping in. It's like saying, "I got this, taxman; I paid my dues upfront." Critical Comparison: Choosing between them is like deciding if you want a tax shield upfront (Traditional 401(k)) or prefer your money growing without a tax shadow, ready to enjoy it all later (Roth 401(k)). The call depends on whether you want a tax break now or dream of a tax- free retirement later. It's a bit like choosing between instant gratification and delayed tax gratification in your financial superhero journey! 3) Define and critically compare ETF’s and no-load Mutual funds. Exchange-Traded Funds (ETFs): ETFs are like investment buddies that let you buy a piece of a big group of stocks or bonds. It's like getting a mixed bag of goodies in one package. They're traded on the stock market, so you can buy or sell them throughout the day like individual stocks. ETFs often have lower fees because they usually track an index, like the S&P 500, rather than being actively managed. No-Load Mutual Funds: Now, imagine a no-load mutual fund as a team of financial chefs. You pool money with others, and these money chefs manage a variety of stocks or bonds for you. No- load means no upfront fees when you join the feast. The chefs aim to grow your money, and you can buy or sell your shares without paying a commission. Comparison: Choosing between them is like picking your flavor at an investment buffet. ETFs are like ready-made dishes, quick and often cost-effective, tracking an index. No-load mutual funds are like a curated menu, managed by experts, aiming for growth without charging you to

get a seat. ETFs might suit those who like simplicity and flexibility, while no-load mutual funds appeal to those who prefer expert management without upfront fees. 4) Define and critically compare Coverdell ESAs, UGMA/UTMAs, and 529 plans Coverdell Education Savings Account (ESA): A Coverdell ESA is like a money sidekick for education. Parents or guardians can save money for a child's education, and the cool part is it's not just for college – it can cover K-12 expenses too. But there's a catch; contributions are limited, and if you don't use the money for education, you might face taxes. UGMA/UTMA Accounts: UGMA/UTMA accounts are like financial gifts from wise relatives. Friends and family can give money or assets to a minor, and it grows until the child becomes an adult. However, when adulthood hits (usually at 18 or 21), the child gets full control over the funds, which could be good or bad depending on their money-handling skills. 529 Plans: Now, picture a 529 plan as the ultimate education savings superhero. It helps you save for higher education expenses, and the real magic is the tax benefits. You put money in, and if it's used for qualified education expenses, there are no taxes. States often run these plans, offering either savings or prepaid tuition options. Comparison: Choosing between them is like deciding on your education savings adventure. Coverdell ESAs are flexible but with contribution limits. UGMA/UTMAs offer gifting flexibility but hand over control to the child. 529 plans are education-focused superheroes, providing tax benefits for higher education expenses. It's about finding the sidekick that aligns with your education savings goals and preferences.

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