Financial Planning Flashcards

For 2026, a worker under age 50 contributes to a 401(k). Which feature distinguishes a Roth 401(k) from a traditional 401(k)?

Answer: Contributions are after-tax and qualified withdrawals are tax-free

Roth accounts are funded with after-tax dollars and qualified distributions are tax-free.

Which factor most strongly favors choosing a traditional (pre-tax) retirement contribution over a Roth contribution?

Answer: Expecting a lower tax bracket in retirement than today

Deducting now at a high rate and paying later at a lower rate makes the traditional account more valuable.

A retiree applies the classic '4% rule.' What does this rule primarily address?

Answer: A sustainable initial withdrawal rate, adjusted for inflation, over about 30 years

The 4% rule suggests withdrawing 4% of the initial portfolio, then inflation-adjusting, to last roughly 30 years.

Sequence-of-returns risk is most damaging to which client?

Answer: A retiree who has just begun taking withdrawals

Poor returns early in the withdrawal phase permanently deplete capital that cannot recover.

Which annuity type most directly hedges longevity risk by providing guaranteed income starting at an advanced age such as 85?

Answer: Deferred income annuity (longevity annuity)

A deferred income annuity pays lifetime income starting at a future date, protecting against outliving assets.

In the U.S., what is the main tax advantage of a Health Savings Account (HSA) used for qualified medical expenses?

Answer: Contributions are deductible, growth is tax-free, and qualified withdrawals are tax-free

HSAs offer a triple tax advantage when funds are used for qualified medical costs.

A client claims Social Security at full retirement age instead of 62. Relative to claiming at 62, the monthly benefit will be:

Answer: Higher, because early claiming permanently reduces benefits

Claiming at 62 permanently reduces benefits by up to 30% versus full retirement age.