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WEALTH BUILDINGand COLLEGE SAVINGSWhat do other high school students know about wealth building?We asked high school students what they would do with an extra 5,000.I’d either buy a used car or put it in thebank so it can grow.Junior, Michigan“I would put half in long termsavings, 2,000 in a collegefund, and spend 500.”Senior, Wyoming“I’d put half in a mutual fund, 1,000 in savings, 1,000 ina money market, and buy agaming system with the rest.”Senior, Missouri“I would save it until I was 18,then put a down payment on ahouse and rent it for profit.”Senior, Texas“Save 3,500 and shop withthe rest.”Junior, AlabamaLearningOutcomesExplain what ismeant by “taxfavored dollars.”List the differenttypes of retirementplans.Differentiatebetween atraditional andRoth IRA.Illustrate how a401(k)companymatch works andprioritize moneyinto variousinvestments.Describe howpre-tax andafter-taxinvestments work.Key terms401(k)ESAIRAPre-TaxRolloverRoth IRATax-Favored Dollars31Sponsored by:

before you beginWhat do you know about Wealth Building and College Savings?Before you watch the lesson on Wealth Building and College Savings, think about what you already know.The word bank below contains some of the bigger concepts that you will learn in this lesson. Completethe first two columns before watching Dave’s lesson as you work through the chapter. Fill in the lastcolumn with the details you learned.I think I know:I want to know:What I learned:401(k)Roth IRAESAUTMA/UGMABefore TaxAfter TaxRule of 72Pension32 Foundations in Personal FinanceSponsored by:

Wealth Building and college savingsRetirement and College FundingOnce the emergency fund is in place, you should beginretirement and college funding, which falls within longterm investing for .Baby Step 1 is in the bank.Baby Step 2 is .Baby Step 3 is months of expenses in anemergency fund.Baby Step 4 is investing 15% of your householdincome into Roth IRAs and pre-tax retirement plans.Invest % of your household income into Roth IRAsand pre-tax retirement plans.Tax-favored means that the investment is in aor has a special tax treatment.The FederalDeposit InsuranceCorporation (FDIC)is responsiblefor insuring orguaranteeingdeposits in banks andsavings institutionsup to 250,000.It was created in1933 to restorepublic confidenceafter thousandsof banks failed.The FederalReserve—sometimescalled “The Fed”—isthe central bankingsystem of the UnitedStates and hasfour main duties:1. It carries out thenation’s monetarypolicies by managingthe supply of money.2. It supervises andregulates bankinginstitutions.3. It maintainsthe stability of thefinancial system.4. It provides financialservices to banks.Chapter 3: Wealth Building and College Savings 33Sponsored by:

Qualified Plans“I paid over 200 for asnowboard becauseI loved the design.I never even usedit once because itturned out to betoo small.” Individual Retirement Arrangement ( ) Simplified Employee Pension Plan ( ) 401(k), 403(b), 457Senior, Wyoming“I bought a guitarwhen I should havepaid for myspeeding ticket.”Senior, Florida“I saved up to buyan expensive hairstraightener only tofind my old, cheapstraightener workedway better.”Individual Retirement ArrangementsWhen it comes to IRAs, everyone with anincome is eligible.The maximum annual contribution for income earners is as of 2008.Junior, MissouriRemember: IRA is not a type of at a bank.It is the tax treatment on virtually any typeof investment.Roth IRAThe Roth IRA is an -tax IRA that grows tax .The Roth IRA isnamed for SenatorWilliam Roth of Delaware, who authoredthis section of theTaxpayer Relief Actof 1997.Why the Roth IRA?The Roth IRA has more .Higher at retirement.34 Foundations in Personal FinanceSponsored by:

Investing 5,000 pre-tax is different than investing 5,000 tax. It takes more than 5,000 to gethome with 5,000 after tax. It would take .There are no taxes when you cash it out, so it forces youto more.The average graduateof a four-year collegehas student loandebt of 19,237.Graduate students pileon even more studentloan debt, ranging up to 114,000.Miles To GoIt has tons of .Nearly half of allAmericans (46%) haveless than 10,000saved for retirement.Who Is Eligible:Miles To Go37% of teens notice Singles—100% contribution with income less than 95,000. Phase out between 95,000- 110,000.Not eligible above 110,000. Married filed jointly—100% contribution withincome less than 150,000. Phase out between 150,000- 160,000. Not eligible over 160,000.their parents beingconcerned aboutretirement.Charles Schwab SurveyOnly 13% of teensknow what a 401 (k)plan is.Charles Schwab Survey29% of teens feelknowledgeable aboutknowing how to payfor college.Charles Schwab SurveyFlexibility of a Roth IRA: Tax-free and penalty-free withdrawals at any timeequal to contributions. After the emergency fund isdepleted, you have a fall back.49% of teens saythey’re concernedtheir parents/guardians will not beable to support themfinancially if theyattend college.Charles Schwab Survey After five years, you can make tax-free, penaltyfree withdrawals for 100% under these conditions:1. Over 59 and a half years oldChapter 3: Wealth Building and College Savings 35Sponsored by:

2. Because of death or disability3. First-time home purchase(max 10,000)END OF VIDEO PART 1Simplified Employee Pension Plan (SEPP)A -employed person may deduct up to %of their net profit on the business by investing in a SEPP. The maximum deductible amount is 45,000 (as of2007) and all employees who have been with the firmmore than three of the last five years must receive thesame percentage of their pay into a retirement plan.Winning the lotterydoes not guaranteepeace of mind whenit comes to yourfinancial future. Infact, Ellen Goodsteinof bankrate.comreported that just theopposite happenedto some lotterywinners—theywent broke.Saving and investinghave nothing to dowith the amount ofmoney you make orget. It is about makingit a priority andbeing smart withyour money.William Post won 16.2 million from the Pennsylvania Lottery in 1988 His former girlfriend sued him and won a share of his winnings. His brother was arrested for hiring a hit man to kill him, hoping to inheritthe winnings. His other siblings harassed him until he invested in a car business and restaurant, both of which failed. He was 1 million in debt just one year later. Ultimately, he declared bankruptcy and now lives on food stamps.Willie Hurt won 3.1 million from the Michigan Lottery in 1989 He spent his money on a divorce and crack cocaine. Two years later, he was broke and facing murder charges.Suzanne Mullins won 4.2 million from the Virginia Lottery in 1993 She borrowed 197,746, using her lottery winnings as collateral. She stopped making payments on the loan after she collected the rest of herwinnings in a lump sum. The company Suzanne borrowed the money from won a judgment against herfor 154,147, but has never seen a dime. Today, she has no assets.36 Foundations in Personal FinanceSponsored by:

401(k), 403(b) & 457 Retirement PlansMost companies have completely done away withtraditional plans.It has been replaced by self- andplans, like the 401(k). The 401(k) is yours, unlike the pension plan whichwas an asset of the company. If the company wentbroke, you most likely lost your pension. If you don’t put money into a 401(k) there will benothing in the fund. A pension, however, is fundedautomatically by your company.The 403(b) is found in non-profit organizations such aschurches, hospitals and schools.The 457 is compensation, which meansyou are deferring or putting off compensation. Usuallythis is available for government employees.The Rule of 72 isa quick way to docompound interestproblems in yourhead. It isn’t exact,but it will give you aquick benchmark tosee how long it willtake to double yourmoney at a giveninterest rate.The Rule of 72 saysthat by dividing theinterest rate into72, it will tell youapproximately howmany years it willtake to doubleyour money.Example: How longwill it take to doubleyour money at 12%?72/12 6 yearsWhat interest ratedo I need to earn ifI want my money todouble in 7 years?72/7 10.28%Do not use a Investment Contract(GIC) or bond funds to fund your plan. This is like a C.D. inside of your 401(k). You will onlymake about 3-4% and it will not help you win long-term.You should be funding your plan whether your companyor not.Chapter 3: Wealth Building and College Savings 37Sponsored by:

RolloversImagine if a couple,who are both 30 yearsold, funds a Roth IRA( 500 per month) at12% interest. At 70years old theywill have. 5,882,386.26, taxfree!Imagine if that samecouple made 40,000and saved 15% in a401 (k) (that’s 500per month or 6,000per year) at 12%interest. At 70 yearsold they will have. 5,882,386.26,tax free!You should always over retirement plans to anwhen you leave the company.Don’t bring the money home, instead, move it straightinto an IRA by a .Roll to a Roth Only If:1. You will have over 700,000 by age 65.2. You can afford to pay the separately, notfrom the IRA.By the time theyretire at age 65, thatcouple’s 1,000 permonth savings in IRAsand 401(k)s will growto: 11,764,772.513. You understand all will become due on theEND OF VIDEO PART 2rollover amount.Retirement LoansNever on your retirement plan. NEVER!Federal Thrift PlanFor federal government workers who have the standardthrift plan, we recommend 60% in the C fund, 20% in theS fund, and 20% in the I fund.38 Foundations in Personal FinanceSponsored by:

Baby Step 4Invest 15% of household income into Roth IRAs andpre-tax retirement.1. Fund 401(k) or other employer plan up to the. (If applicable)2. Above the match, fund IRAs. If thereis no match, start with Roth IRAs.3. Complete 15% of income by going back to yourEND OF VIDEO PART 3or other company plans.There are no fill-in-the-blanks for Part 4.END OF VIDEO PART 4Scholarships aren’tjust for the highestscorers on the ACTor SAT. Schools andfoundations havebroadened their criteria to include community involvement,after-school workand financial status inaddition to the traditional athletics and diversity scholarships.Don’t avoid the scholarship applicationsrequiring essays. It isa good way to improveyour writing skillswhile earning scholarships. Here aresome additional resources to look into.1. Talk to yourguidance counselor.College Funding2. Explore your state’swebsite.Save for your children’s education usingtax-favored plans.First.Save for college by first using Educational SavingsAccounts (ESA), nicknamed “Education .”You may save 2,000 (after tax) per year, per child, thatgrows tax free! So, if you start when your child is bornand save 2,000 a year for 18 years, you would onlyinvest a total of 36,000. However, at 12% growth, yourchild would have 126,000 for college—TAX FREE!3. Many businesseshave scholarships foremployee’s children.Ask your parents tocheck at their place ofemployment.4. Explore the federalgovernment’s websiteat studentaid.ed.gov5. Check out the bigcollege organizationsfor information(collegeboard.com,petersons.com).6. Apply forscholarships withlocal organizationssuch as Rotary Clubs.Chapter 3: Wealth Building and College Savings 39Sponsored by: