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Retirement and Wealth Management Flashcards

7 cards from real CLU practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. A 55-year-old client wants to withdraw from their 401(k) to fund a business venture. Which exception to the 10% early withdrawal penalty would NOT apply in this scenario?

    Answer: First-time homebuyer exception

    The first-time homebuyer exception applies to IRAs only, not to 401(k) plans.

  2. What is the primary advantage of a Roth conversion ladder for early retirement planning?

    Answer: Tax-free access to converted principal after 5 years without penalty

    Each Roth conversion becomes penalty-free after its own 5-year holding period, allowing early retirees to access funds before age 59½.

  3. A defined benefit pension plan uses a 'final average pay' formula. An employee's last 5 years of salary are $80k, $85k, $88k, $90k, and $92k. What is the final average pay used in the benefit calculation?

    Answer: $87,000

    Final average pay is calculated as the arithmetic mean of the specified salary years: ($80k+$85k+$88k+$90k+$92k)/5 = $87,000.

  4. Which Social Security claiming strategy allows a married couple to maximize lifetime benefits when one spouse has significantly higher earnings?

    Answer: Higher earner delays to age 70; lower earner claims early for income

    The higher earner's delayed credits maximize the survivor benefit, while the lower earner's early claim provides needed income during the deferral period.

  5. Under ERISA, what is the maximum period a defined contribution plan can require for an employee to become fully vested under a cliff vesting schedule?

    Answer: 3 years

    ERISA requires cliff vesting to be completed within 3 years for defined contribution plans, meaning 100% vesting by year 3.

  6. A client has a large IRA and is concerned about estate taxes. Which strategy allows the client to convert IRA assets into life insurance death benefits that pass income-tax-free to heirs?

    Answer: Wealth Replacement Trust funded by IRA distributions

    A Wealth Replacement Trust uses after-tax IRA distributions to fund life insurance, replacing the estate value lost to income taxes on RMDs with income-tax-free death benefits.

  7. What is the 'sequence of returns risk' and when is it most damaging to a retirement portfolio?

    Answer: The risk that poor early returns during distribution phase permanently deplete the portfolio faster

    Negative returns early in the distribution phase force selling more shares at depressed prices, permanently reducing the portfolio's ability to recover even if later returns are positive.