CFC Retirement Planning 2 — Questions and Answers
Question 1: Which Social Security strategy for married couples often maximizes lifetime household benefits?
- Both spouses claim at age 62
- Higher earner delays to age 70; lower earner claims earlier (Correct answer)
- Both spouses claim at full retirement age simultaneously
- Lower earner delays to 70; higher earner claims early
Correct answer: Higher earner delays to age 70; lower earner claims earlier
Having the higher earner delay to age 70 maximizes the survivor benefit and the couple's lifetime income, while the lower earner can claim earlier to provide near-term cash flow.
Question 2: A client converts $50,000 from a traditional IRA to a Roth IRA. The tax consequence is:
- No tax — conversions are always tax-free
- The $50,000 is added to ordinary income in the conversion year (Correct answer)
- Capital gains tax on the $50,000
- A 10% early withdrawal penalty regardless of age
Correct answer: The $50,000 is added to ordinary income in the conversion year
Roth conversions are treated as ordinary income in the year of conversion, potentially pushing the client into a higher tax bracket.
Question 3: Under ERISA, plan fiduciaries must act solely in the interest of plan participants and must apply the standard of:
- A reasonable business owner
- A prudent expert investor (Correct answer)
- A licensed CPA
- A registered investment adviser
Correct answer: A prudent expert investor
ERISA's prudent expert standard requires fiduciaries to act with the care, skill, prudence, and diligence of a knowledgeable financial professional.
Question 4: Which IRA contribution is NOT tax-deductible at the federal level?
- Traditional IRA contribution for a low-income non-covered worker
- SEP-IRA contribution
- Roth IRA contribution (Correct answer)
- Traditional IRA contribution below the income phase-out
Correct answer: Roth IRA contribution
Roth IRA contributions are always made with after-tax dollars and are never deductible, though qualified withdrawals are tax-free.
Question 5: What is the penalty for taking a distribution from a traditional IRA before age 59½ without a qualifying exception?
- 5%
- 15%
- 10% (Correct answer)
- 20%
Correct answer: 10%
Early distributions from traditional IRAs are subject to a 10% federal penalty tax in addition to ordinary income tax, unless an exception applies.
Question 6: Sequence-of-returns risk is most dangerous for retirees because:
- It increases inflation over time
- Poor returns early in retirement, combined with withdrawals, permanently deplete the portfolio (Correct answer)
- It raises RMD amounts each year
- It eliminates Social Security cost-of-living adjustments
Correct answer: Poor returns early in retirement, combined with withdrawals, permanently deplete the portfolio
When poor market returns occur in early retirement while the retiree is withdrawing funds, fewer shares remain to benefit from eventual recovery, accelerating portfolio depletion.
CFC Retirement Planning 2
Which Social Security strategy for married couples often maximizes lifetime household benefits?