MONEY MANAGEMENT QUIZ #2
Michigan Credit Union League - Your Money Matters
As promised, we will continue with part two of the money-management quiz.
Today's continuation of Kiplinger's Personal Finance Magazine's money management quiz will look at financial penalties - much like football, little mistakes can mean a loss of yards. We will also take a look at life's little safety nets and what kinds of precautions you and your family should take to assure a safe financial future.
1. You've been a happy homeowner for six years and the value of your house has risen, but you're still paying $450 a year for private mortgage insurance. How much equity do you need to have in your home before your lender will consider lifting the insurance requirement?
d. Any increase in your home's value is enough, so go for it.
2. How much should a lawyer charge you to prepare a simple will?
3. You're leaving your job and are entitled to a distribution from your 401(k) tax-deferred retirement plan. You ask to have the money paid to you directly so that you can reinvest it. What happens next?
a. You're in for a great vacation.
b. A big chuck of your money will go straight from your employer to the IRS.
c. You'll owe a penalty as well as the taxes due.
d. b and maybe c
4. You own a vacation cottage in the mountains, which you rent-out part of the year and treat as business property on your tax return. You and your kids spend a couple of weeks there every summer. Now your sister-in-law wants to stay there for a few days while she visits a local craft fair. Should you let her?
a. Why not? She's family, so you won't lose your tax break.
b. No way. You're the only family member who may use the house.
c. Sure, as long as she pays the utility bill.
d. Sure, if you're willing to give up some of your summer vacation or some of the tax breaks that go along with the house.
5. Your beach vacation wiped out your wallet and you had to take a cash advance on your credit card. When you get your next statement you notice that a hefty surcharge has been added to your bill. What gives?
a. Sand and salt must have eroded the magnetic strip.
b. You exceeded your credit limit.
c. You were hit with an uncapped charge on cash advances.
d. You were out of state when you got the money.
6. Your car has finally died and you're looking for a cheap loan to buy a new one. You decide to borrow against the $30,000 you have in your tax-deductible IRA. What happens next?
a. You drive off in a shiny new Jeep Cherokee.
b. You get a below-market interest rate.
c. You're hit with an early withdrawal penalty of 10%.
d. You look elsewhere for a loan because you can't borrow against an IRA.
1. B, 20%. Lenders generally look for a loan-to-value ratio of 80%, meaning the loan amount is about 80% of the value of the house, before they'll drop the mortgage insurance. But to make your case, you may have to pay for a new appraisal.
2. B, $300. Drawing up a simple will is so inexpensive that you can't afford not to do it, especially if you have minor children for whom you should name a guardian.
3. D, 20% withholding for the IRS is automatic if the money is paid to you. However, you can avoid that hit by having your company transfer the money to a rollover IRA or another 401(k) plan. Any part of the payout you don't roll over will be taxed in your top bracket. And, if you're under the age of 55, you will be hit with a 10% penalty for early withdrawal.
4. D, you may have to give up vacation time or tax breaks. Your cottage qualifies as a business property ? giving you the chance to deduct losses - only if family members limit their usage to 14 days a year, or 10% of the time it is rented, whichever is greater. In Uncle Sam's eyes, your sister-in-law is considered family.
5. C, you were hit with an uncapped charge on cash advances. Such charges can be as much at 2% to 5% of the loan amount, so check your card's policy before you take out the cash, or switch to a card that puts a ceiling on its cash-advance fees.
6. D, you can't borrow against an IRA. You can withdraw from the account, but you'll be hit with a 10% penalty for premature distribution if you are younger than 59 1/2. Plus, the full amount of the withdrawal will be included in your income for the year and taxed in your top tax bracket. However, the law does allow you to borrow against your 401(k) plan if your employer permits it.
You're doing great! Keep up the good work and relax, there's only one more quiz to go.