AFC Investment and Retirement Planning 5

Question 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?

Accepted Answer

$8,000

Answer

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.

Question 2

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

Accepted Answer

Taxable brokerage account

Answer

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.

Question 3

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

Accepted Answer

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

Answer

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.

Question 4

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

Accepted Answer

Maximize return for any given level of risk

Answer

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

Question 5

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

Accepted Answer

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

Answer

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

AFC - Accredited Financial Counselor Practice Test

AFC - Accredited Financial Counselor Practice Test

AFC Investment and Retirement Planning 5