CFP Retirement Planning & Distribution Strategies 2 — Questions and Answers
Question 1: A client wants to retire at age 62. Which Social Security strategy should they consider regarding claiming benefits?
- Claim immediately at 62 for maximum lifetime benefits
- Wait until full retirement age (FRA) or later to maximize monthly benefit (Correct answer)
- Always claim at age 62 regardless of health status
- Claim at 62 and invest the proceeds for higher returns
Correct answer: Wait until full retirement age (FRA) or later to maximize monthly benefit
Delaying Social Security benefits until FRA or age 70 increases the monthly benefit, which is generally advisable for healthy clients with longer life expectancies.
Question 2: What is the maximum annual contribution to a SEP-IRA for a self-employed individual in 2024?
- $61,000
- $66,000
- $69,000 (Correct answer)
- $76,500
Correct answer: $69,000
The SEP-IRA contribution limit for 2024 is the lesser of 25% of compensation or $69,000.
Question 3: Which retirement plan type is best suited for a small business owner with no employees who wants the highest possible contribution limit?
- SIMPLE IRA
- Solo 401(k) (Correct answer)
- Roth IRA
- Payroll Deduction IRA
Correct answer: Solo 401(k)
A Solo 401(k) allows both employee and employer contributions, enabling contributions up to $69,000 in 2024 (plus catch-up), making it optimal for solo self-employed individuals.
Question 4: What does the term 'vesting schedule' refer to in a 401(k) plan with employer matching?
- When the employee can begin contributing to the plan
- The schedule by which the employee earns ownership rights over employer contributions (Correct answer)
- The timeline for when the employer must fund the plan
- How often the investment allocations are reviewed
Correct answer: The schedule by which the employee earns ownership rights over employer contributions
A vesting schedule determines when an employee gains full ownership of employer-contributed funds, either through cliff vesting or graded vesting.
Question 5: A 55-year-old client leaves their employer and wants to access 401(k) funds without penalty. Which rule allows this?
- Rule of 55 (Correct answer)
- Rule of 72
- SEPP 72(t) rule
- Roth conversion rule
Correct answer: Rule of 55
The Rule of 55 allows penalty-free 401(k) distributions if the employee separates from service in or after the year they turn 55.
Question 6: What is the primary tax advantage of a defined benefit pension plan for high-earning business owners compared to a defined contribution plan?
- Lower administrative costs
- Higher potential annual contribution limits based on funding required to meet projected benefit (Correct answer)
- No vesting requirements
- Tax-free distributions in retirement
Correct answer: Higher potential annual contribution limits based on funding required to meet projected benefit
Defined benefit plans allow much higher deductible contributions because they are actuarially calculated to fund a specific future benefit, often exceeding DC plan limits.
CFP Retirement Planning & Distribution Strategies 2
A client wants to retire at age 62.
Which Social Security strategy should they consider regarding claiming benefits?