AFC Retirement & Investment Planning 2

Question 1

A client is considering a Traditional IRA to Roth IRA conversion. What is the primary tax consequence?

Accepted Answer

The converted amount is added to taxable income in the year of conversion

Answer

The converted amount is treated as ordinary income in the year of conversion since money moves from tax-deferred to tax-free status.

Question 2

What is sequence of returns risk and why is it dangerous for retirees?

Accepted Answer

Risk that poor returns early in retirement permanently deplete a portfolio when combined with withdrawals

Answer

Poor returns early in retirement, when the portfolio is largest and withdrawals compound losses, can permanently deplete savings.

Question 3

A married couple is deciding when to claim Social Security. The higher earner's FRA benefit is $2,800/month. What strategy maximizes lifetime benefits?

Accepted Answer

Higher earner delays to 70 while lower earner claims earlier for household income

Answer

Delaying the higher earner's benefit to 70 maximizes both their retirement benefit and the survivor benefit.

Question 4

What is the purpose of Required Minimum Distributions from Traditional retirement accounts?

Accepted Answer

To collect income taxes on previously tax-deferred contributions and earnings

Answer

RMDs ensure taxes are eventually collected on tax-deferred retirement savings.

Question 5

A 45-year-old client wants to withdraw $20,000 from their Roth IRA. They have $15,000 in contributions and $5,000 in earnings. How much is tax and penalty-free?

Accepted Answer

$15,000 (contributions only)

Answer

Roth IRA contributions can always be withdrawn tax and penalty-free since they were made with after-tax dollars.

AFC - Accredited Financial Counselor Practice Test

AFC - Accredited Financial Counselor Practice Test

AFC Retirement & Investment Planning 2