AFK Retirement Planning Flashcards

What is the primary advantage of a SEP IRA for a self-employed individual compared to a traditional IRA?

Answer: Much higher contribution limits

A SEP IRA allows contributions up to 25% of net self-employment income (up to $69,000 in 2024), far exceeding the $7,000 traditional IRA limit.

What is the 4% rule in retirement planning?

Answer: Withdraw 4% of the portfolio in year one, then adjust for inflation each year

The 4% rule suggests withdrawing 4% of a retirement portfolio in the first year and adjusting annually for inflation, aiming for a 30-year portfolio lifespan.

Which account type is NOT subject to required minimum distributions during the original owner's lifetime?

Answer: Roth IRA

Roth IRAs are not subject to RMDs during the original owner's lifetime because contributions were made with after-tax dollars.

A SIMPLE IRA is designed for employers with how many employees or fewer?

Answer: 100

SIMPLE IRAs are available to employers with 100 or fewer employees who received at least $5,000 in compensation in the preceding year.

What is a Roth conversion, and what is its primary tax consequence?

Answer: Transferring traditional IRA funds to a Roth IRA; the converted amount is taxable as ordinary income

A Roth conversion moves pre-tax funds from a traditional IRA to a Roth IRA, and the converted amount is included in taxable income in the year of conversion.

Which of the following best describes sequence-of-returns risk in retirement?

Answer: The danger that poor early returns deplete a portfolio before recovery can offset withdrawals

Sequence-of-returns risk refers to the danger that experiencing large portfolio losses early in retirement—combined with ongoing withdrawals—can permanently impair a portfolio's sustainability.