AAMS Retirement Planning & Distribution Strategies 2 — Questions and Answers
Question 1: Which of the following is a key advantage of a defined benefit (DB) pension plan over a defined contribution (DC) plan?
- Employee bears the investment risk
- Employer bears the investment risk and guarantees benefits (Correct answer)
- Employee controls investment options
- Benefits depend on account balance at retirement
Correct answer: Employer bears the investment risk and guarantees benefits
In a defined benefit plan, the employer shoulders the investment risk and guarantees a specific retirement benefit based on a formula.
Question 2: What does the term 'vesting' mean in the context of employer-sponsored retirement plans?
- Employee's right to make plan contributions
- Employee's non-forfeitable right to employer contributions (Correct answer)
- Maximum contribution allowed per year
- Penalty for early withdrawal
Correct answer: Employee's non-forfeitable right to employer contributions
Vesting refers to the employee's right to keep employer contributions; once fully vested, those contributions cannot be forfeited.
Question 3: Which distribution strategy systematically withdraws from taxable accounts first, then tax-deferred, then tax-free to maximize tax efficiency?
- Bucket strategy
- Systematic withdrawal plan
- Traditional sequencing strategy (Correct answer)
- Roth conversion ladder
Correct answer: Traditional sequencing strategy
The traditional sequencing strategy withdraws from taxable accounts first, then tax-deferred (e.g., traditional IRA), then tax-free (e.g., Roth) accounts to manage tax brackets efficiently over time.
Question 4: Under the SECURE Act (2019), most non-spouse beneficiaries inheriting an IRA must deplete the account within:
- 5 years
- 10 years (Correct answer)
- 15 years
- Their life expectancy
Correct answer: 10 years
The SECURE Act eliminated the stretch IRA for most non-spouse beneficiaries and required full distribution within 10 years of the account owner's death.
Question 5: Which of the following individuals qualifies for a Health Savings Account (HSA) to supplement retirement medical expenses?
- An employee enrolled in a traditional PPO plan
- A Medicare-enrolled retiree over age 65
- An employee enrolled in a High-Deductible Health Plan (HDHP) (Correct answer)
- A Medicaid recipient
Correct answer: An employee enrolled in a High-Deductible Health Plan (HDHP)
Only individuals enrolled in a qualified High-Deductible Health Plan (HDHP) are eligible to contribute to an HSA.
Question 6: A client converts $50,000 from a traditional IRA to a Roth IRA. The primary tax consequence is:
- No tax due if under age 59½
- The $50,000 is added to ordinary income for the year (Correct answer)
- Capital gains tax applies on the converted amount
- A 10% penalty on the full conversion
Correct answer: The $50,000 is added to ordinary income for the year
Roth conversions from traditional IRAs are taxable events; the converted amount is treated as ordinary income in the year of conversion.
Question 7: What is 'longevity risk' in retirement planning?
- The risk of outliving one's assets (Correct answer)
- The risk of poor investment performance
- The risk of inflation eroding purchasing power
- The risk of losing Social Security benefits
Correct answer: The risk of outliving one's assets
Longevity risk is the risk that a retiree will outlive their financial assets, leaving them without sufficient income in late retirement.
AAMS Retirement Planning & Distribution Strategies 2
Which of the following is a key advantage of a defined benefit (DB) pension plan over a defined contribution (DC) plan?