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Investment and Retirement Planning Flashcards

7 cards from real AFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Investment and Retirement Planning flashcards as text

  1. A client has a traditional IRA with a basis of $20,000 and a current value of $100,000. They withdraw $10,000. How much of the withdrawal is taxable?

    Answer: $8,000

    Using the pro-rata rule, 20% of the IRA is basis ($20k/$100k), so 20% × $10,000 = $2,000 is tax-free and $8,000 is taxable.

  2. Which investment vehicle offers a step-up in cost basis at the account owner's death, making it advantageous for estate planning?

    Answer: Taxable brokerage account

    Assets in a taxable brokerage account receive a stepped-up cost basis to fair market value at the owner's death, potentially eliminating capital gains tax on appreciation.

  3. What is the primary purpose of a Qualified Longevity Annuity Contract (QLAC) within a retirement account?

    Answer: To defer income and RMDs on a portion of IRA funds until as late as age 85

    A QLAC allows up to $200,000 of IRA funds to be excluded from RMD calculations until annuity payments begin, which can be deferred until age 85.

  4. In Modern Portfolio Theory, the efficient frontier represents portfolios that:

    Answer: Maximize return for any given level of risk

    The efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined level of risk.

  5. A client exercises non-qualified stock options (NQSOs). When does ordinary income tax apply?

    Answer: When the options are exercised (spread between FMV and strike price)

    With NQSOs, ordinary income tax is triggered at exercise on the spread between the fair market value and the exercise price.

  6. Which of the following is a characteristic of a defined benefit pension plan?

    Answer: The employer bears the investment risk

    In a defined benefit plan, the employer promises a specific benefit and bears the investment risk to fund that obligation.

  7. A 40-year-old client asks about the '4% rule' for retirement withdrawals. What does this rule suggest?

    Answer: Withdraw 4% of the initial portfolio value annually, adjusted for inflation, for a 30-year retirement

    The 4% rule, from the Trinity Study, suggests withdrawing 4% of the initial portfolio in year one and adjusting for inflation annually has historically supported a 30-year retirement.