AFIP AFIP Tax Planning and Retirement Strategies 3

Question 1

Which of the following correctly describes the 'step-up in basis' rule for inherited assets in U.S. tax law?

Accepted Answer

The cost basis of inherited assets is reset to fair market value at the time of the owner's death

Answer

Inherited assets retain the original owner's cost basis for capital gains purposes

Answer

Inherited retirement accounts are exempt from all income taxes

Answer

Beneficiaries must pay estate tax on assets before receiving the step-up

Question 2

What is the 'Saver's Credit' (Retirement Savings Contributions Credit) designed to do?

Accepted Answer

Offer a tax credit to low- and moderate-income individuals who contribute to retirement accounts

Answer

Provide a tax deduction for employer contributions to employee retirement plans

Answer

Eliminate the 10% early withdrawal penalty for first-time home buyers

Answer

Allow high-income earners to make back-door Roth IRA contributions

Question 3

In the context of retirement planning, what does 'sequence of returns risk' mean?

Accepted Answer

The danger that poor investment returns early in retirement can permanently deplete a portfolio

Answer

The risk that inflation will outpace investment returns during retirement

Answer

The risk of receiving retirement distributions in the wrong order from multiple accounts

Answer

The possibility that interest rates will decline after purchasing fixed annuities

Question 4

What is the tax treatment of Social Security benefits for higher-income retirees in the United States?

Accepted Answer

Up to 85% of Social Security benefits may be subject to federal income tax depending on combined income

Answer

Social Security benefits are always 100% tax-exempt at the federal level

Answer

Social Security benefits are subject to a flat 15% federal withholding tax

Answer

Social Security benefits are only taxable at the state level, not federally

Question 5

What is a 'Stretch IRA' strategy, and how did the SECURE Act affect it?

Accepted Answer

A strategy where non-spouse beneficiaries spread IRA distributions over their lifetime; the SECURE Act limited most non-spouse beneficiaries to a 10-year distribution window

Answer

A strategy allowing IRA owners to increase contributions over time; the SECURE Act doubled contribution limits

Answer

A strategy converting Traditional IRAs to Roth IRAs over multiple years; the SECURE Act eliminated this option

Answer

A strategy using IRA funds to purchase annuities; the SECURE Act expanded this to include foreign annuity products

Question 6

Which strategy involves converting Traditional IRA funds to a Roth IRA during a year when the account holder has unusually low income?

Accepted Answer

A Roth conversion

Answer

A direct rollover

Answer

A backdoor contribution

Answer

A 72(t) distribution