AFIP AFIP Tax Planning and Retirement Strategies 2 — Questions and Answers
Question 1: Which retirement savings vehicle allows employees to contribute pre-tax dollars and is sponsored by a for-profit employer?
- 403(b) plan
- 457(b) plan
- 401(k) plan (Correct answer)
- SIMPLE IRA
Correct answer: 401(k) plan
A 401(k) plan is an employer-sponsored defined contribution retirement plan available to employees of for-profit companies, allowing pre-tax salary deferrals.
Question 2: What distinguishes a 'defined benefit' plan from a 'defined contribution' plan?
- Defined benefit plans are funded entirely by employees; defined contribution plans are funded by employers
- Defined benefit plans guarantee a specific retirement income; defined contribution plans depend on investment performance (Correct answer)
- Defined contribution plans are only available in the public sector
- Defined benefit plans have no vesting requirements
Correct answer: Defined benefit plans guarantee a specific retirement income; defined contribution plans depend on investment performance
Defined benefit plans (pensions) promise a specific monthly benefit at retirement, while defined contribution plans define only the contribution amount with no guaranteed benefit.
Question 3: What is the primary purpose of a 'Section 1035 exchange' in the context of insurance and annuity products?
- To convert term life insurance into whole life insurance without a medical exam
- To exchange one annuity or life insurance policy for another without triggering a taxable event (Correct answer)
- To transfer retirement plan assets from one employer plan to another
- To move funds from a taxable investment account into a tax-deferred annuity
Correct answer: To exchange one annuity or life insurance policy for another without triggering a taxable event
A Section 1035 exchange allows policyholders to transfer the cash value from one life insurance or annuity contract to a new one without recognizing a taxable gain.
Question 4: For a married couple filing jointly in the U.S., what is the primary benefit of 'income splitting' in retirement planning?
- It doubles the allowed IRA contribution limits
- It may reduce the couple's overall tax burden by utilizing lower marginal tax brackets (Correct answer)
- It allows each spouse to claim the full standard deduction separately
- It eliminates the requirement for Required Minimum Distributions
Correct answer: It may reduce the couple's overall tax burden by utilizing lower marginal tax brackets
Income splitting between spouses in retirement can keep combined income in lower marginal tax brackets, potentially reducing the household's total tax liability.
Question 5: What is the 'catch-up contribution' provision in U.S. retirement law?
- A provision allowing employees to make up for missed employer matches
- An additional contribution amount permitted for individuals aged 50 and older in retirement accounts (Correct answer)
- A tax credit for low-income earners who contribute to retirement plans
- A provision allowing self-employed individuals to contribute more than salaried workers
Correct answer: An additional contribution amount permitted for individuals aged 50 and older in retirement accounts
Catch-up contributions allow individuals aged 50 and older to contribute amounts above the standard annual limits to 401(k)s, IRAs, and other qualified retirement plans.
Question 6: What is a 'qualified longevity annuity contract' (QLAC) and what planning problem does it address?
- A life insurance contract that eliminates estate taxes for long-lived individuals
- A deferred annuity that begins payments at an advanced age, reducing RMDs and insuring against outliving assets (Correct answer)
- A joint annuity that covers both spouses for their combined lifetimes
- An annuity structured to replace Social Security income for high earners
Correct answer: A deferred annuity that begins payments at an advanced age, reducing RMDs and insuring against outliving assets
A QLAC is a deferred income annuity purchased within a retirement account that can delay payments up to age 85, reducing RMDs and providing income protection for advanced age.
AFIP AFIP Tax Planning and Retirement Strategies 2
Which retirement savings vehicle allows employees to contribute pre-tax dollars and is sponsored by a for-profit employer?