Case Studies & Practical Application Flashcards

A client receives a $200,000 inheritance and asks whether to pay off her 3.5% mortgage ($180,000 balance) or invest. Her marginal tax rate is 24% and she itemizes deductions. What is the after-tax cost of the mortgage?

Answer: 2.66%

The after-tax cost of a deductible mortgage is rate × (1 − tax rate) = 3.5% × (1 − 0.24) = 2.66%, which helps compare the true cost against expected investment returns.

A planner is reviewing an investment policy statement (IPS) for a 55-year-old client with a 70/30 equity/bond allocation. The portfolio has drifted to 82/18 after a strong equity market. What is the appropriate action?

Answer: Rebalance to 70/30 by selling equities and purchasing bonds

Rebalancing restores the portfolio to the client's target risk profile as outlined in the IPS, preventing unintended risk exposure from allocation drift.

Tom, 68, has $900,000 in a traditional IRA, $200,000 in a taxable brokerage, and receives $28,000/year in Social Security. He has no pension. What strategy best manages his Medicare IRMAA surcharge risk?

Answer: Do systematic Roth conversions in years before RMDs become large to reduce future MAGI

Strategic Roth conversions before RMDs peak can reduce future MAGI, helping avoid or reduce IRMAA surcharges on Medicare Parts B and D premiums.

A client's 10-year-old son has $30,000 in a 529 plan. The client is now considering a private high school at $40,000/year starting in four years. Can 529 funds be used?

Answer: Yes, up to $10,000 per year in K-12 tuition from a 529 is federally tax-free

The Tax Cuts and Jobs Act expanded 529 plans to allow up to $10,000 per beneficiary per year for K-12 tuition at public, private, or religious schools.

A 50-year-old client earns $250,000 and has no employer retirement plan. She wants to use a defined benefit plan for maximum deductions. Which is the most likely advantage over a SEP-IRA?

Answer: Potentially higher deductible contribution based on actuarially determined benefit targets

A defined benefit plan allows contributions based on actuarial calculations targeting a specific retirement benefit, often enabling contributions well above the SEP-IRA limit for older high earners.

A client owns a vacation home that she rents for 80 days and personally uses for 25 days per year. How is this property classified for tax purposes?

Answer: Mixed-use property — rental income is reported but personal-use days prevent deducting net rental losses

When personal use exceeds the greater of 14 days or 10% of rental days, the property is mixed-use: rental income is taxable but net rental losses cannot be deducted.

Sarah is a 42-year-old physician with $800,000 in student loans at 4.5% average interest. She earns $350,000 and is considering Public Service Loan Forgiveness (PSLF) by joining a nonprofit hospital. What is the primary planning consideration?

Answer: She must work 10 years at a qualifying employer while making income-driven repayments before forgiveness

PSLF requires 120 qualifying monthly payments under an income-driven repayment plan while employed full-time at a qualifying nonprofit or government employer.